Newbie Lessons - All your questions answered

[burglar]

Care to put that on a chart Burglar?

Cheers Sir O

I had accepted your challenge!
I had put it on a chart.
Due to my computer being riddled by corrupted files I am unable to display it here!

The line I drew was a straight line touching lows of mid Feb2013, late Jun, late Jul and end Oct2013.
It did indeed, slice through a large red candle in mid Nov2013 at around $21.50

Cheers burglar

 

[Valued]

May I ask why?



So in terms of the exit signals you would have used are based on price action and the formation of a lower high, lower low formation. As a secondary confirmation you'd use a low term moving average and some of the current volumetrics.

Sounds good....is it always that easy?

Cheers
Sir O

For exit signals I use price action and volume. The moving average isn't that relevant. It just happened to fit nicely with around where I was talking about. It's not always that easy. For example, can you tell from price action and volume where where the market is starting to top out at the end of a bull run? Maybe it can be done or maybe it can't, but it's not as easy as keeping Dow's definition of a trend in your back pocket.

As for why I wouldn't hold for that long, I don't like money doing nothing for me and at risk. If a stock is in a side ways action I would exit and wait for the breakout. You may say this would reduce profit but my money could be doing other things while waiting. I would miss the initial surge from the breakout but I also wouldn't be holding through all the downswings. Some of those trading ranges lasted for months. That's months your money is not doing anything for you. You're actually losing money due to opportunity cost. Now we don't know they would have lasted for months but normally I would give up after a week of not seeing anything happen and come back to the stock later, especially since I would be using options a lot of the time for stocks that allow it. I can't afford time decay.

 

[Sir Osisofliver]

I had accepted your challenge!
I had put it on a chart.
Due to my computer being riddled by corrupted files I am unable to display it here!

The line I drew was a straight line touching lows of mid Feb2013, late Jun, late Jul and end Oct2013.
It did indeed, slice through a large red candle in mid Nov2013 at around $21.50

Cheers burglar

Like this?

Cheers

Sir O

 

[Sir Osisofliver]

For exit signals I use price action and volume.

Lets drill down on this comment Valued...why? Can you explain for me why price action is so important in your analysis rather than say...pattern analysis.....or the use of an indicator or three?

For example, can you tell from price action and volume where where the market is starting to top out at the end of a bull run? Maybe it can be done or maybe it can't, but it's not as easy as keeping Dow's definition of a trend in your back pocket.

Who me? Uh it's been known to happen....but not because I've been looking at a technical chart in isolation. I look at a large number of factors to decide whether we are at the end of an economic cycle.

As for why I wouldn't hold for that long, I don't like money doing nothing for me and at risk. If a stock is in a side ways action I would exit and wait for the breakout. You may say this would reduce profit but my money could be doing other things while waiting. I would miss the initial surge from the breakout but I also wouldn't be holding through all the downswings. Some of those trading ranges lasted for months. That's months your money is not doing anything for you. You're actually losing money due to opportunity cost. Now we don't know they would have lasted for months but normally I would give up after a week of not seeing anything happen and come back to the stock later, especially since I would be using options a lot of the time for stocks that allow it. I can't afford time decay.

OK a lot of the above has to do with your strategy....options orientated...short time scale... scary Greeks will get you if you hold too long ...but you've mentioned a couple of things I highlighted...risk and opportunity cost...that for newbies probably needs to be understood.

Risk
So assume I was in around September 2012 as Burglar suggested... and that I purchased a nice round 10,000 units of JBH. How much risk did I take? How do I meaningfully compare the risk against a benchmark?

The market during the September 2012 - November 2014 period moved from ~4300 - ~5400 an increase of 25.6%, as opposed to my level of return, which was during the same period somewhere between 119% and 158%

Opportunity Cost

You mentioned opportunity cost, if I was in in September 2012 from October 2012 to February 2013 I'd have had very little movement (while the market went from 4400 to 4900). You are undoubtedly correct that during this period of time there would have been other investments I could make that would have outperformed my holding during that time. If I had chosen to do so I could have exited the position and then re-entered (hopefully not missing the price and volume signals that triggered an entry in Early February an not missing the gap)... but is opportunity cost that simple?

Many things have pro's and con's, rarely is something black and white, and so the opportunity cost for me is the time commitment that jumping in and out takes, and there would have easily been a dozen instances where the stock went sideways for a week or more. What if I'd missed a re-entry signal...that would defray my return....potentially significantly.

Cheers

Sir O

 

[burglar]

... Like this?

Cheers

Sir O

Exactly!
How did you know?

 

[Sir Osisofliver]

Exactly!
How did you know?

Not quite where my line is (I'll show you what I did later).

OK Burglar in Late June and July with the placement of that line (which is in hindsight) you had small breaks of your ascending support line.

Why didn't you transact at either of those points?

Cheers

Sir O

 

[burglar]

... Why didn't you transact at either of those points?

Cheers

Sir O

Because I'm not good at this game ... yet!





I did notice the small breaks as I drew the line.
Just couldn't see the relevance/importance.

I am guessing that the type of stop-loss employed
would leave a little room for running the winners.
Now you'll be asking me, "How much room do ya leave?"

 

[tech/a]

Historical low for entry.
Historical high for exit.
Cycle 5 yrs.
Length of Trend (peak to valley) and angle very similar to the historical high of 5 yrs. ago.
Time of trend Jan to Jan (a year) also the same.

So end of cycle for me.

 

[Valued]

Lets drill down on this comment Valued...why? Can you explain for me why price action is so important in your analysis rather than say...pattern analysis.....or the use of an indicator or three?

Sir O

I do use indicators but mostly I use them to get a feel for where a stock is at. I use the 200 SMA as well as short term SMA and EMA just to help define the price action and show in a different way what has been happening to the price both short term and long term. Indicators lag behind the price. They are a derivative of price action and can only present the price action in a different way. That's the only reason I use them, to present the price action in a different way to candlesticks or bars.

There is no publicly available evidence that pattern analysis works. The issue with pattern analysis is that patterns are merely a symptom of price action and if patterns do work, then they are based on psychology of the market. Patterns are simply another lagging indicator, a derivative of price. Drawing patterns only presents the price in a different way (or at least allows you to see it in a different way) but it's the same price action. There is nothing special about patterns but it may help someone perceive certain price action in a way that their mind works. For example, someone may be able to recognise an ascending triangle better than they could see higher lows bumping up against resistance. However, I would say that you should consider the source, the price action and volume rather than relying on patterns which are symptoms or derivatives. The symptoms could be wrong and price action and volume may paint a different picture than what the pattern suggests.

Of course, anything can be wrong too. The last two days I had two stocks that were up about 5%, gave off a no supply signal the day before, and both got absolutely smashed on open, faster than I could sell my call options. Thankfully I only lost a small amount on one and was able to break even on the other. The increased volatility can soften the blow of a plunge in the intrinsic value.

 

[Sir Osisofliver]

Because I'm not good at this game ... yet!

I did notice the small breaks as I drew the line.
Just couldn't see the relevance/importance.

I am guessing that the type of stop-loss employed
would leave a little room for running the winners.
Now you'll be asking me, "How much room do ya leave?"

Indeed I will, because that question is...how much room do you leave for noise rather than trend?



Ok here's a more interesting looking chart...which has a couple of questions..

The purple line is where and when I moved my stop...yes sometimes I went for months not moving my stop. So...why didn't I transact on the 23rd of May?

I would have have a nice Profit (In $8.96, Out ~$16.15)

Should I have re-entered on the 17th of December?

Cheers

Sir O

 

[tech/a]

I do use indicators but mostly I use them to get a feel for where a stock is at. I use the 200 SMA as well as short term SMA and EMA just to help define the price action and show in a different way what has been happening to the price both short term and long term. Indicators lag behind the price. They are a derivative of price action and can only present the price action in a different way. That's the only reason I use them, to present the price action in a different way to candlesticks or bars.

There is no publicly available evidence that pattern analysis works. The issue with pattern analysis is that patterns are merely a symptom of price action and if patterns do work, then they are based on psychology of the market. Patterns are simply another lagging indicator, a derivative of price. Drawing patterns only presents the price in a different way (or at least allows you to see it in a different way) but it's the same price action. There is nothing special about patterns but it may help someone perceive certain price action in a way that their mind works. For example, someone may be able to recognise an ascending triangle better than they could see higher lows bumping up against resistance. However, I would say that you should consider the source, the price action and volume rather than relying on patterns which are symptoms or derivatives. The symptoms could be wrong and price action and volume may paint a different picture than what the pattern suggests.

Of course, anything can be wrong too. The last two days I had two stocks that were up about 5%, gave off a no supply signal the day before, and both got absolutely smashed on open, faster than I could sell my call options. Thankfully I only lost a small amount on one and was able to break even on the other. The increased volatility can soften the blow of a plunge in the intrinsic value.

http://thepatternsite.com/

they are based on psychology of the market

ADD THE WORD---PARTICIPANTS
Done and am doing a lot of work on Patterns.
Flatly don't agree.
Evidence indicates they are like a road map to sentiment.
Some far far better than others.
In context of chart life also far more valuable.

Single bar and cluster bar price action coupled with volume ---I would argue is simply another pattern.
A read of Market participant psychology.

Subjective.
Well if it is its not a pattern worth consideration.---in my view of course.

 

[Sir Osisofliver]

Historical low for entry.
Historical high for exit.
Cycle 5 yrs.
Length of Trend (peak to valley) and angle very similar to the historical high of 5 yrs. ago.
Time of trend Jan to Jan (a year) also the same.

So end of cycle for me.

So you're looking at data from 2009-2010....does past price action have a use-by date?


Sir O

 

[tech/a]

So you're looking at data from 2009-2010....does past price action have a use-by date?


Sir O

They tell me history repeats!
Bet you were grabbing a scotch 5 yrs ago!

 

[Sir Osisofliver]

Nicely Answered - thank-you.

I do use indicators but mostly I use them to get a feel for where a stock is at. I use the 200 SMA as well as short term SMA and EMA just to help define the price action and show in a different way what has been happening to the price both short term and long term. Indicators lag behind the price. They are a derivative of price action and can only present the price action in a different way. That's the only reason I use them, to present the price action in a different way to candlesticks or bars.

Correct, indicators lag behind the price action, so would you agree with the comment that Indicators should only be used to confirm the analysis that occurs in price action? Would this mean you rank price action as a higher quality analysis tool than indicators?

(The reason that I stress this is that my experience with Newbies is that they are lured into feeling that indicators are silver bullets...when they are the least important of our analysis techniques.)

There is no publicly available evidence that pattern analysis works. The issue with pattern analysis is that patterns are merely a symptom of price action and if patterns do work, then they are based on psychology of the market. Patterns are simply another lagging indicator, a derivative of price. Drawing patterns only presents the price in a different way (or at least allows you to see it in a different way) but it's the same price action. There is nothing special about patterns but it may help someone perceive certain price action in a way that their mind works. For example, someone may be able to recognise an ascending triangle better than they could see higher lows bumping up against resistance. However, I would say that you should consider the source, the price action and volume rather than relying on patterns which are symptoms or derivatives. The symptoms could be wrong and price action and volume may paint a different picture than what the pattern suggests.

Hmm... Ok I would say that patterns are emergent from price (not lagging per say). I would also say that certain emergent patterns are of a higher quality of analysis than indicators, but not as high as Price action.

Basically everything works...for a given value of "works". What is important then is...which patterns work?

link

You might find this interesting....

Cheers

Sir O

- - - Updated - - -

http://thepatternsite.com/

ADD THE WORD---PARTICIPANTS
Done and am doing a lot of work on Patterns.
Flatly don't agree.
Evidence indicates they are like a road map to sentiment.
Some far far better than others.
In context of chart life also far more valuable.

Single bar and cluster bar price action coupled with volume ---I would argue is simply another pattern.
A read of Market participant psychology.

Subjective.
Well if it is its not a pattern worth consideration.---in my view of course.

Ninja'd - I linked that as well

Sir O

 

[Sir Osisofliver]

They tell me history repeats!
Bet you were grabbing a scotch 5 yrs ago!

So for the newbies...that's a no. Price action doesn't have a use by date. Agree? Disagree?

 

[tech/a]

So for the newbies...that's a no. Price action doesn't have a use by date. Agree? Disagree?

My experience is that regardless of timeframe the market has a memory.
At times though it will display Alzheimer's at others it will be photographic.

 

[Trembling Hand]

My experience is that regardless of timeframe the market has a memory.
At times though it will display Alzheimer's at others it will be photographic.

And therein lies the problem with T/A for newbies. We are all controlled by our biases. If you are new to the game T/A isn't much better than a dart throw for predicting future movements. If you have seen the game 1000s of times you're more likely to be biased by the pattern and general market rather than hope. Just like any field, what counts is experience not the tools.

 

[Valued]

Sir O I might not even go as far to say that indicators should confirm your analysis. If your analysis is good, who cares if some indicator doesn't confirm it. You could go to a software package out of 400 indicators and find one that fits your analysis. If your indicators are constant and your indicators disagree with your assumptions about price action, I think it's prudent to find out why. For example, indicators may signal downwards action but the price, volume, resistance, and support as well as news/announcements may point you in a different direction. Indicators do not confirm your original analysis and should not make you feel safe but they may help you point out an anomaly if something is clearly wrong. For example, you should probably have a good reason if you're choosing to sell once your stock breaks through the upper Bollinger band. It's not that bollinger bands are special, they just tell us that something is rising quite far, depending how many standard deviations you set your bands too. We don't normally sell into markets that are actually rising (as opposed to markets that just were rising and stop - that's a good time to sell).

 

[tech/a]

And therein lies the problem with T/A for newbies. We are all controlled by our biases. If you are new to the game T/A isn't much better than a dart throw for predicting future movements. If you have seen the game 1000s of times you're more likely to be biased by the pattern and general market rather than hope. Just like any field, what counts is experience not the tools.

You put it the best way I have seen it described.

Not exact words but to the effect.

If your in a crowd YOU will pick out your mothers face from 1000s
Others wont recognise her.

Personally I have a whole family.

That's why the argument of self fulfilling prophecy is
in my view at best very limited.

We don't normally sell into markets that are actually rising (as opposed to markets that just were rising and stop - that's a good time to sell).

Many do!!
You may wish to re visit this statement.--on your own level and timeframe.

 

[burglar]

Indeed I will, ...

As you did not require provisioning of staples, you had run a very loose stop loss strategy! :
I would have thought a trailing stop would have been more appropriate.

... have a nice Profit ...

You and I are not in this game to make a
nice Profit.

... Should I have re-entered ...

Only if you wanted to!!
I suspect it did not fall in with the original plan i.e. squeezing the shorts.
It would therefore require a new plan.