Sails Up

Short EUR/$

Good CCI divergence on the charts.  The economic calendar shows good numbers on the GBP.  I expect a DXY pullback.  However the economic calendar lists pirate activity this week so will keep my position size 33% of normal with a wide stop.

Update:  position open, currently below the 1.185 stop-loss

Short EUR/NOK

Daily high-test and double top off the 50 ema.  I expect the GBP and USD to apply downward pressure on the Euro.  NOK is a commodity currency.  Position sizing will be halved due to correlation with EUR/$ short.

Update:  position open, currently below the 9.366 stop-loss

Update:  took a minor short on AUD/JPY at 87.3;  closed position early at +15% of required margin due to change in retail positioning.

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Have A Calculated Edge

Do you have a calculated edge?

It is important to have an edge as a trader.  But, what is an edge?  And how do I act on it to minimize risk and profit consistently.

The generic definition of an edge is this: an edge is a higher likelihood of one outcome happening over a second outcome.

With this definition in mind, let’s take a look at a simple scenario that illustrates an edge.

If you play heads or tails, with a friend, with a coin that you know is weighted more on one side (heads by 70%) than the other (tails), does it make sense to try and predict whether the number of heads will exceed the number of tails by the end of the day?

No, because each outcome is not random, you know that over time if you keep calling heads you will be wrong more often than you are correct.

The exact same can be said about trading. Simply put, once you have found an edge, all you have to do is keep applying that edge to the market whenever it presents itself.  Different traders hold different kinds of edges.  The type of edge you hold matters little.  What matters is that your edge is profitable and can be applied consistently.  And, if you have multiple edges, that definitely matters!

There is no point in guessing whether the next trade is going to be a winner or a loser. Guessing is futile.  Don’t guess your way into a soupline. When your edge is present, you don’t need to guess what the ruling market will do next.

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Do you have a clearly defined edge?

So what is my edge?  I have multiple edges since I prefer a good nights rest …and need my beauty sleep.

My #1 edge is Mindset –I know that money is a means and not an end.  I know that markets rule 24 hours a day, non-stop.  Missing a trade means nothing, losing a trade means little.  I know there are many more trades that are correlated  and time-lagged to any that I miss or lose.

My #2 edge is Money Management  —the money management model I developed over the years minimizes risk and adapts to trader performance.  When I take a loss, it is minor …gains always exceed losses.  My model is based on the work of great minds like:

  • Ed Thorpe
  • Claude Shannon
  • John Kelly, Jr.

At least one of those names should ring a bell.  Afterall, Claude Shannon (M.I.T.) is the father of modern Information Theory!

My final edge is market analysis which I learned from taking the first two CFA exams; as well as learning entry & exit points according to price charts (technical analysis).

What is your edge?

When thou sittest to eate with a ruler, consider diligently what is before thee…              –prov XXIII

Confluence

Preparations are key.

Preparations

Would you cast off the lines before checking for foul weather?  How about leaving port without a radio check?  Ever been at sea without a storm anchor?  Would you enter the harbor without checking the tide?   Only if you’re an Oscar.

To navigate the sea of emotion and fear in the markets, you must be able to asses the waves, weather and readiness of the ship.  All in conjunction with one another.

Some refer to this as “stacking confluence:”

  • Market Condition:  check charts, avoid indecision and choppy waters.
  • Market Phase: enter when the tide pulls back.
  • S/R: go long from support lines & short off resistance lines.
  • Indicators: If you use a compass,  understand its underlying principle.  
  • Price Patterns: Look for one of the primary price patterns.
  • Candlestick Patterns: keep an eye out for deceleration in price.

Any less than four given factors and I tie-off to starboard, sails down.

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Sails Up

Apply risk management to your alternative investments.

Short AUD/JPY

I expect the easterly winds to push down the AUD/JPY this week.  The Reserve Bank of Australia  (recent dovish rhetoric) did not hike rates recently.  Also the Chinese slowdown is putting overall downward pressure on commodity currencies.

However, I always rely on charts for navigable water, such as:

  • a weekly high-test with cci divergence
  • daily decelleration with cci divergence
  • top of a head & shoulders pattern on the daily chart

The Japenese Yen, a safe-haven (funding) currency, may rise above the AUD a bit this week to offset the expected decrease in the DXY.  I will be on the lookout for an updraft to the DXY to signal a flattening or decreasing of the Yen.

Use wide stops, in this case above JPY89.  Cap risk at a predetermined limit that does not change unless something outside of emotion justifies the change.  My target holding period is no more than 10 days, depending on the Winds.

trade closed:  stopped out at JPY89.2   risk capped at -1.9%

Short NZD/USD

High probabilility of the DXY  rebounding off 93, good probability of weekend gap in price action to fall, good CCI divergence on daily & weekly.  Conservative lot size and wide stop due to Fed meeting this week.  Stop loss set above USD00.75

trade closed:  stopped out at USD.755  risk capped at -1.1%

Read up on the Sintra Accord.

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fairweather & following seas