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This is actually an interesting thread.

Here is an example: Mr. New Trader wants to replace his current salary of $50k a year with trading income so he no longer has to work for his boss. He’s going to start with $10,000 of savings. This money is of course after tax so it represents about 24% of his actual net income depending on his tax bracket for a single year. It’s no small amount. Typically New Trader is doing this outside of his other investments and chances are good that this allocation is greater than his Investment Advisor would recommend. Most AI’s will suggest a 10% allocation or less to alternative investments to help balance portfolio risk and lower Return Correlation amongst assets. If New Trader saves ten percent of his gross each year for investments ($5000) than only $500 or less should be allocated to FX.

The problem is New Trader is no idiot, has already done some homework; he’s been on the boards and he’s seen a bunch of systems and traders who can make double digit returns every month, but he knows with a $500 allocation (or there about), that it will take him nearly 50 months (4 years) to get to the point where he can replace his income… That will never do. So he’s decided to use the $10k he has in his account which is the equivalent of 20 years worth of alternative investment allocation. This though only momentarily bothers him, because it will be totally worth it when his is completely independent. Trading for a living is going to be Sweet…

New Trader calculates if he can average ten percent a month with his $10,000 he can be at his goal in just about 18 months, maybe less. This seems much more realistic to New Trader… Now he just needs to get his approach down and get to trading.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Too bad its not on video.

At my work, we trade primarily eurodollar future spreads which means for everything we buy, we sell something against it. We are always hedged.

Pretty much the whole company is split into groups of 2 or 3 with a leader of the group (day shift trader) who primarily makes decisions about portfolio strategies and pays themselves, and the one or two other people in the group who manage the portfolio (European and Asian shifts).

So anyway, to the story. Starting with the huge drop in the S&P on monday, my boss developed a keen interest in trading the S&P future. Now, she wasn’t just trading 3-5 lots max; she was trading 5 lots adding to 45-50 max. I watched her do this as she made tens of thousands of dollars in the matter of a few hours. As interesting as this profit was, I knew that the risk involved may not be worth it based on her discipline. So, I asked her, “where is your stop loss?” and she responded speechless. This is when I realized she did not have enough discipline to trade the S&P future. So, the other teammate we work with and I had discussed her actions and both agreed that this trade was too risky for any of us and we both felt scared by the risk she was taking.

On Tuesday, we both at separate times expressed that we were uncomfortable with her new interest. I told her, “I don’t want to come in one day and see you down 100k from a bad trade”. I’m not sure what my boss told my other teammate, but she assured me that she was “also scared when she had 45 lots on” and she would, “From now on only put on 15 lots max.” and put a stop loss at the amount she made from it. I foolishly believed her, but I’ve been trading with her for about 4 months now and know her styles. I should have put my foot down.

On Wednesday, my darkest fears came true like a prophecy. Around noon, in the middle of my economics class (I’m still in college. bleh), my teammate called me (He was just casually checking our positions online) and told me my boss was currently short 100 S&P’s and the S&P was rallying pretty strongly. I was a bit fearful, but assured him that the online positions must be wrong as they were wrong the day before and perhaps they had not been fixed correctly. I knew this wasn’t the truth and even if it was incorrect, it wasn’t incorrect by 100 lots. I sat through the rest of my class sweating out knowing what I would find when I walked into work only an hour later.

Sure enough, as I walked in, my boss embarrassed, asked me to walk away for about an hour and come back (She’s never asked me to do that. Even on a day she lost 70k). I took this hour to call my teammate and confirm that both of our fears were definitely true. While he was on the phone with me he was still keeping a close track to the positions from online and told me she had just bought 600 Ten Year note futures while still short 100 S&P’s. For those of you who don’t know, this is the total opposite of hedging despite her buying something against a short. She had pretty much double downed on this losing trade.

She finally called me over and took me outside in the freezing cold to tell me she lost money, a lot of money. I was so pissed at this time because she didn’t know that I already knew that what we had said only the day before had happened. I just didn’t know the magnitude. All she kept telling me was she lost a lot of money. I refused to respond at all to anything she said. Then a few co-workers came over and she was telling us all what happened and finally spit out the figure she had lost: $625,000. I immediately walked away to walk around the block, so that I didn’t do anything i would have regretted. This was the money we had worked 4 months on to earn. This was the money that paid our salaries.

It’s been 3 days and I’m still getting pissed every couple of hours. I’m not sure if I’m more mad at her or more mad at myself for not being a little more persuasive in my warnings. I just needed somewhere to write this down. Man… I am so pissed off.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

In my prior post called “The Worst It’s Ever Been?“, I compared the current market environment with three prior market crashes (1929, 1961, and 1987) in the Dow Jones Industrial Average. This was all sparked by a chart that Barry Ritholtz posted on The Big Picture. On the prior post, Bill Rempel left a comment asking “What’s your assessment of the four-year period BEFORE each date?”

Good question! I found a great site called Measuring Worth that has historical closing data for the DJIA going back to 1885(!) among other cool datasets. I was able to take the crash data I plotted yesterday, and append four years worth of data to the front of each set. (One note: I erroneously referred to the y-axis of each chart previously as “% Decline from Peak”, where what I was really showing was “% of Peak Value”. You knew what I meant, though :P )

Here’s the first extended chart, showing % of Peak Value vs. Trading Days. The legend gives the starting year of the dataset:

For a slight adjustment we ratio each time series into equal parts as I did previously:

From this chart, two things are evident to me. First, 1929 and 1987 both had quite a run-up going into the crash, while 1961 and 2007 have a much more moderate advance prior to the peak. These first two seem like bubble bursts in every sense, with a fast, dramatic crash ending a spectacular and ever-accelerating rise. The latter two seem to behave more like secular bear markets, with not a lot to show for 4.5 years of time one way or the other, with rallies and even declines taking quite a bit of time to form.

From this analysis, I would expect our current market environment to behave in future more like a 1961 and less like a ‘29 or ‘87. Any continued decline should be moderate, and I would stick to the 70% of peak number that I referred to earlier as a downside target for the Dow. Further, I would also expect the current market to decline more slowly and steadily rather than over only a couple of days. Now that we know the big weekend sell-off was caused by “Le Societe Genius-ale” and their fall guy (Rogue Trader my @$$), I would lean even harder in the direction of “slow and steady bear market” instead of a true market crash for the future. Caveat: Should more sub-prime, credit-default swap or other financial atom bombs drop, we could be in for more market fireworks. Heck, even The Beard arguably lost his head during the big sell-off as SG liquidated their position! People are jittery, and should they all decide to run for the exits, then all historical bets could be off. Should be fun times ahead in any case!

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Originally, I set up the rainbow chart with WMAs 10 - 240 on a 144 tick chart. That seems to be a common setting for tick chart users.

I also plotted those MMAs on a one minute chart, but then the longest MA would encompass four hours. Using the one minute chart for an example, I used several MAs in increments of three - from three to 59. The reason I’m using the minute based chart is so that its easy to see that we’re talking about one hour. For day trading, these could be considered long term holders. Obviously, traders use different time frames depending on their style.

On this particular chart, the light blue lines paint a picture of the short term action, while the red lines cover the longer period. So what’s the big deal with all of these MAs. Here’s one simple strategy to help you identify the trend, and find an entry point.

I circled two possible entry points that would have enabled you to ride this trend down. If you are a scalper, you could grab a few quick points, and be done. This is the basic idea. Since the red lines are the longer MAs on this chart, watch for them to spread out. If they are widening in an orderly fashion, watch the blue lines for a possible entry. When the blue lines converge, and form a hook, your entry point is when they start to move down. How do you know its a safe entry? Well, you don’t really know anything, but with the red lines spread out, the chances of that pullback turning into a reversal of the dominant trend is unlikely.

On these two trades, the CCI confirmed the entry.

The basic premise behind MMAs is to help determine the dominant trend, and find a safe place to enter in that direction. Hopefully, as a new thrust is starting.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Barry Ritholtz from The Big Picture recently posted a chart of three prior stock market crashes in the S&P compared with our current market environment. There were some comments about the charts not being to any kind of scale to each other. I wanted to analyze a bit more. Of course this is all moot, thanks to the Beard Power unleashed last week, but indulge my study for the pure academia ;)

Unfortunately, being the cheapskate I am, I didn’t have access to free data for the S&P past 1950. So I took historical data for the Dow Jones Industrial Average from Yahoo Finance instead. I tried to isolate the data that was used in the Big Picture post. My charts of the Dow are above the charts Barry posted of the S&P:

Source: Bronson Capital Markets and http://bigpicture.typepad.com/

As you can see, I think I match the time periods in question pretty well. I then plotted them all on the same chart on a basis of percent correction from the peak vs. trading days after the peak:

To non-dimensionalize the time factor, I plotted the data against a ratio of start-to-finish time. For 2007, I assumed that if the current correction is indeed a crash it will follow the 1961 and 1987 time ratios fairly well:

The data from the 1929 crash really went on for a long time compared to the other crashes. When you isolate it to the first trading year after the peak, and ignore the protracted bear market through 1933, you get a more congruent picture:

Still, the data is not similar in that the 1929 data contains a large rally before the ultimate resumption of the killer bear market. I decided to truncate the 1929 data after the first higher low (at 79 trading days or 12/23/1929) as the 1961 and 1987 datasets seem to have been truncated. This would mark the end of the crash and the beginning of a new upward trend phase. The curves then collapse in a very satisfactory way:

Should this time prove to be a true crash, we can expect (according to historical average) to hit around a 70% decline from Dow 14,000 putting us near Dow 9,800. To stay on target for a similar timeframe, it would have to come sometime in the first two weeks of February. We’ll see if it all pans out and my assumptions are correct. It should be an interesting few weeks either way!

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If you watch the matrix you can see some small lag issues with the data. They are minor today, but during the high-volume days recently it made trading impossible at times. The depth would be more than 1 point away from the last price. So… which one was accurate? No way to know without looking at another feed.

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H/T HPT

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• audio dharma.org
  This site is an archive of Dharma talks given at the Insight Meditation Center since 2000.
  (tags: Buddhism mp3 zen)

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HPT is taking an important step that should benefit him.

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

First of all, let me say that I traded for the first time today. Things were calmer, and I had a good day. I added those multiple moving averages over the setup I was already using, and by the end of the day it was making sense. After I have a better grasp of what I’m looking at, and not just what they’re telling me to look for, I’ll write something up. I had to make a few changes in the setup to accommodate all of those MAs. If you are interested, there is plenty of stuff out there. Google MMAs or Guppy MMAs for more information.

For you fans of Prospectus, he’s back. He’s actually giving good commentary, but for some reason he’s stubborn. Check out any of my posts on blowups for his insight. Who knows, he may even write an article or two. If he doesn’t, I may highlight the comments themselves, but it seems like he has a lot to say - and offer!

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I was a little angry after my blowup. The good news is its received over 7 million hits!

NSFW

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

He even posts a picture of the house he will lose if he goes broke. It appears he took out major loans to finance this endeavor. Who knows what happened with that Apple position.

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

So let the smacking of head with hand begin as I discover in Multicharts that the Channel Breakout LE and SE also have an indicator written for them as well.

The Signal triggers a long or a short based on when the the current bar is pierces the last high or low of a period of time.

So if you add the signal, I think the length default is 20, you can add the indicator Price Channel and set the length to the same and give it a view. Neat!

Paper Trading today consisted of going up to ~+$1000 and back down to ~+$400 on one contract per trade.
ie meaningless.

RWD
Like before I need conditions of when to take profits and stop out. Likely it will be when in a trade and a plot cycle forms, go flat and wait for the next signal. There are sessions where the drawdown will get extreme.
I need to write the means to plot trendlines between the long and the short or wrap them in a signal so I can get some historical perspective on all this.

I am considering having a Day Trading Stop as well.
As P/L goes +, if it retraces and is High -$N, then stop for the day.
If P/L goes -$N, Stop for the Day. I am ok with this.

Hopefully I have the picture setup here correctly, dont want to raise the ire of the Richard, the Keeper of Ways. :)

E.

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

need no stinkin’ prices!

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This is the chart that Eric mentioned.

There are different variations, but the one I setup is using 10WMA - 240WMA in increments of 10.

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