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On the world's financial markets and stock exchanges. Part 11

On the world's financial markets and stock exchanges. Part 11

1. What is a trading strategy? 

 

A trading system or strategy is the result of careful and meticulous study of the financial markets. It is the apogee and logical outcome of the future trader or active investor. It reflects all analytical work and willingness to react to any changes on the market.

A trading system allows bringing orderliness into trading operations, adjusting prognostic methods to individual needs of a trader, removing or reducing the psychological burden during the decision-making process. Professionally built trading system is a pledge of success in carrying out operations.

It is not enough just to analyze the market, it is also necessary to build a forecast and implement it, as well as take into account risks that the trader assumes.

A trading system includes a certain set of conditions and rules that determine moments and order of performing the following actions:

  • opening of a position
  • position closing

When constructing a TS, a number of questions should be answered:

  • what tools to use when carrying out operations (stocks, commodities, currency pairs)?
  • which method of analysis to use (technical, fundamental or a combination of these)?
  • what time interval should be used?
  • which indicators to use?
  • operating principle (trend, channel)
  • What lot to work with?
  • what rules apply for opening and closing the position?
  • How long should the position be held?
  • how to set a stop-loss?

 

2. Basic rules for building a TS

 

To build a trading strategy, the trader needs to consider the basic rules of constructing the TS:

  • Positive expectation - a property of the system to be generally profitable over a long period of time. It is determined by the fact that the average profit of all trades during the testing period is greater than 0.
  • Small number of rules.
  • Stability of the system.
  • Varying of trade lots
  • Risk control, capital management and diversification.
  • Mechanistic nature of the system.
  • Applicability.

To correctly approach the construction of TS, taking into account deep understanding of how financial markets work, you should remember about some principles:

  • Principle 1.Price is determined by the supply and demand ratio. 
    Conclusion: Only the behaviour of the price is relevant.
  • Principle 2. The future behaviour of prices is probabilistic.
    Conclusion: You can make a lot of money in the market if you estimate the probabilities correctly;
    the probability of winning increases with an investment horizon.
  • Principle 3. The market moves along the path of least resistance.
    Conclusion: Overcoming resistance levels indicates the path of further movement.
  • Principle 4. The market has inertia.
    Conclusion: do not count on a quick change in the direction of the price movement.

 

3. Options 

 

Based on the aforementioned conditions, the main examples of TS operation are working on the level breakout and rebound (it's recommended to remember the theory of Dow about the construction and purpose of support and resistance levels, and the candlestick analysis).
To begin with let's remember about types of resistance and support levels.

First of all they are not just lines on the chart plotted on price highs and lows, they are zones, which are several points wide and are determined by how participants react to certain movements (spread, expectations, aggressiveness or conservativeness of entry, etc.)
Resistance and support levels are of 2 types:

  • inclined, which form price channels
  • horizontal, which are divided into 3 types
    - technical (built directly on the maximum and minimum price points or on the greatest contact)
    - psychological (they are usually round figures or price comfort levels for central banks)
    - historical (the same as technical but with a longer time horizon or built on a longer time frame).

The levels are described in increasing order of importance. The passage of such levels has several stages:

  • Piercing - the price passes the level (resistance or support) only by the shadow of the candle and then goes back. 
    It is a "Warning!" signal and only confirms the presence of the level.
  • A breakout is a signal to open a trading position.
    It appears when the price closes below the support or above the resistance level. It can be of 2 types:
    - Breakout with confirmation - when the price returns to the level, determining its changed status (resistance to support and vice versa). It is used for conservative strategy. It is the best signal! It is used less often, than the other varieties
    - Classical breakout - when the price goes sharply below (above) the level. It is a good variant for a pending order and happens much more often.

As a rule, upon exiting the channel, the price makes a sure distance equal to the channel width - that's our profit according to TS work on breakout.

The placing of pending orders in such TS is determined by general rules (buy-stop, buy-limit, etc.). 
A good example of breakout of a sloping price channel is a price exit from a triangle pattern.

Question: Find the points of opening a trading position here.

To determine the necessity of the concept of money management, you need to clearly understand the non-linear relationship between losses and profits that exists in trading in general. A loss of 10% would require you to make a subsequent profit of 11% to get back on track. And after a loss of 50%, you would need to make a profit of 100% to get back on track. The general consensus of analysts is that the maximum allowable loss, which would still allow a turnaround, is 30%. At this loss, it would be necessary to make a 50% profit afterwards - this is considered achievable. A loss of 50% or more is almost certain to result in the financial death of the investor.

 

What is capital management?

 

  • Rules for placing a stop - order.
  • Selection of trading lots.
  • The % of TS in the ratio of profitable to losing trades.
  • The ratio of risk-return.
  • When to close a trade or where to place the profit?

The basic rule of stop-order installation:
Stop order is placed only where there is a high probability of price moves in the opposite direction!
Stops are placed on 2 principles:

  • at levels of previous highs or lows
  • in target zones restricted by our deposit.

The choice of trade lots is closely related to your deposit and is subject to the recommendation of not more than 10% of total trades at a time.

The average percentage return of the trading system is 3 / 7, i.e. 30% of profitable trades. This is a perfectly working TS. A good one is 50/50. Here the explanation will be the risk-profit ratio or the rule of stop and profit order placement. A simple recommendation: for each point of loss, the expected profit should be 3 points. 

Example. A stop order is placed 30 pips away from the current price value. In this case the expected return should be 90 pips. Using the risk-profit ratio 3 / 7, the total loss after 10 trades will be 7x30 = 210 points, while the profit will be 3x90 = 270, which is a profit according to the results of the reporting period.

The most difficult thing in the future is to determine the profit point:

  • Expected target zone (Fibonacci series, support and resistance levels)
  • Indicative exit (the most popular) - an exit based on indicator signals.
  • Statistical expectation (channels, triangles)

 

 

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IndexaCo
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Wells Wilder Jr. first described in his 1978 book "New Concepts in Technical Trading System", a classic work on technical analysis that we heartily recommend. (See "Recommended Reading" at the end of the chapter.) The Directional Movement Indicator (DMI) is a useful and versatile technical study that has two remarkable functions. First, the DMI itself is an excellent market directional indicator. Second, one derivative of the DMI is the important Average Directional Movement Index (ADX), which not only allows us to identify markets that are trending, but also provides a way to assess trend strength.The calculation of directional movement (DI) is based on the assumption that when there is an uptrend, today's price peak should be higher than yesterday's. Conversely, when there is a downtrend, today's bottom price should be lower than yesterday's. The difference between today's and yesterday's peak is an upward move or +DI. The difference between today's and yesterday's troughs is a downward move or -DI. Internal days where today's peak or trough is not superior to yesterday's are essentially ignored. The positive and negative DI are separately averaged over a period of a few days and then divided by the average "true range". The results are normalised (multiplied by 100) and shown as oscillators. For readers with mathematical inclinations, we have included detailed calculations. Fortunately, we can now produce the necessary indicators with only three or four taps on the computer keyboard. Calculation of Directional Movement (DM - Directional Movement) A Directional Movement is the largest part of today's price range that is outside yesterday's range.Outside days will have both +DM and -DM.     Use the larger one.The inside days have zero DM.Limit days will have a DM calculated as in the diagrams shown above. For example, for an upper limit day (first chart) +DM will be the difference between A and the upper limit reached on the next C day. ADX calculation 1. Measure the directional movement (DM).2) Measure the true range (TR - true range) which is defined as the greater of:a) The distance between today's peak and today's trough.b) The distance between today's peak and yesterday's close.c) The distance between today's trough and yesterday's close.Divide DM by TR to obtain a directional indicator (DI- directional indicator).DI=DM/TRThe result can be positive or negative. If it is positive, it is the percentage of the true range that has risen on the day. If it is negative, it is the percentage of true range that is down for the day. +DI and -DI are usually averaged over a time period. Wilder recommends 14 days. Then we get the following calculations:+DI14 = +DM14/TR14 or -DI14 = -DM14/TR14+DI and -DI are two of the three values normally shown as DMI. The third is the ADX obtained as follows:4.   Calculate the difference between +DI and -DI. DI DIFF=|[(+DI)-(-DI)]|5.   Calculate the sum of +DI and -DI.DISUM=|[(+DI)+(-DI)]|6.    Calculate the directional index of motion (DX).DX=( DI DIFF/ DISUM)*100100 normalises the value of DX so that it falls between 0 and 100. The DX itself is usually very volatile and is not shown. 7.   Calculate the moving average DX to obtain the Average Directional Movement Index (ADX). The smoothing is usually on the same number of days as the +DI and -DI calculation.8.   Further smoothing can be done by calculating a derivative of the ADX moment type called the average directional movement index rating (ADXR -average directional movement index rating).ADXR = (ADX t + ADX t-n) /2where t is today and t-n is the day the ADX calculation started.Displayed on the computer screen as an oscillator, directional movement moves upwards when +DI is greater than -DI. If +DI is less than -DI, the movement is directed downwards. As the two lines diverge, the directional movement increases. The greater the difference between +DI and -DI, the greater the directionality of the market or the steeper the trend. Wilder used 14 days as the basis of his calculations because he considered 14 days an important half cycle. We think there are more optimal time periods depending on what you are going to do with DMI and ADX.DMI studies on a computer monitor usually appear as three lines: +DI, -DI and ADX. (Some programs present the ADX separately for convenience.) As we said, the results of DMI calculations are normalized (multiplied by 100), so the lines will fluctuate between 0 and 100. The important ADX indicator is derived directly from +DI and -DI and measures the magnitude of the market trend. The higher the ADX, the more directional the market has moved. Correspondingly, the lower the ADX, the less directional the market has moved. Note that when we say "directional" we can mean either upward or downward. The ADX does not distinguish between a rising and falling market. It is important to clearly understand that the ADX measures the magnitude of a trend, not its direction. It is perfectly normal for the ADX to clearly rise while prices are falling because its rise reflects the increasing strength of the downtrend.The other oscillators, +DI and -DI, show the direction. When +DI crosses with -DI and goes higher, the trend is up. When +DI crosses with -DI and goes lower, the trend is downward. The further apart the lines then diverge, the stronger the trend.In his book, Wilder also describes the calculation of the average directional moving index rating or ADXR (average directional moving index rating). This is simply the sum of the ADX at the beginning of the period (say 14 days ago) and today's ADX divided by two. This extra smoothing of the ADX was done by Wilder to attenuate the fluctuations to the point where ADXR can be used in a market comparison calculation called the Commodity Selection Index. From our perspective, the ADX has been sufficiently smoothed initially and additional smoothing is not necessary. In fact, for our purposes, the smoothing that has been done to produce the ADXR reduces the performance of the indicator. DMI Performance Testing Quite a few DMI and ADX performance tests have been published. The results have generally been better than most other indicators. Here we will give some examples.Bruce Babcock has tested the DMI and described the results in his book "The Dow Jones - Irwin Guide to Trading Systems" (see references at the end of the chapter). When testing the DMI, Babcock entered into a long position at the close when the general directional movement was positive. When the general directional movement was negative, the system conversely entered into a short position. The results of Babcock's testing showed that over a five-year period, the 28-day DMI was profitable over a wide range of markets. However, the internal losses were significant because no stops were applied. The system tested by Babcock was the simplest use of the indicator and many of Wilder's basic rules were broken. Importantly, Wilder's suggestion to use waiting for the top or bottom of the day to cross the DI on entry was ignored (we found Wilder's recommendation for entry significantly reduces twitching). In Babcock's test, income was taken clearly at the crossovers and no attempt was made to take income earlier. The fact that the DMI showed significant returns under these conditions is amazing! Although we do not recommend trading DMI in this way, the Babcock test showed that a fairly long DMI could prove to be a useful indicator for setting entry times.A more realistic test/optimisation was conducted by Frank Hochheimer of Merill Lynch Commodities. Hochheimer tested two cases: case 1, which followed Wilder's basic rules, and case 2, which simply traded on crossovers. Most of the markets used 11 years of data. Since this test was also optimization, it tested +DI and -DI by independently changing the number of days used in each (something we don't recommend doing). Not surprisingly, case 1, which followed Wilder's suggestion of entering a buy or sell at the level of the previous day's peak or trough, proved more profitable. Optimisation of DI periods showed that the best time intervals lay between 14 and 20 days. Our independent testing of ADX on different data sets confirms the profitability of this range from 14 to 20 days with the best results shown on 18 days.The Encyclopedia of Technical Market Indicators, Colby and Meyers did a very curious DMI test with the ADX built in. They entered at the +DI and -DI intersection only when the ADX was rising. They exited when the ADX fell or a reverse crossover occurred. They only tested the New York Composite on weekly data, using intervals from 1 to 50. The best returns were on time intervals of 11 to 20 weeks. They noted that of the many indicators they tested, the DMI method had the fewest losses and is worth further investigation.At first glance it may appear that Colby and Mairs were following the trend, trading only on the rise of the ADX. However, because they applied trading based on +DI and -DI crossovers after the ADX rise, the system was more of a counter-trend method because the rising ADX was the result of the presence of the trend before the current crossover. When +DI and -DI crossed after the ADX rose, it was a signal to trade in the opposite direction of the trend as measured by the rising ADX.We find the ADX moderately useful as a timing indicator, despite some positive test/optimisation results mentioned earlier. The DMI is a trend following indicator, and is subject to the same weaknesses as any form of trend following. When markets are not in trend, +DI and -DI cross in different directions constantly, producing one painful twitch after another. These are sensitive indicators that give good results in trend-following markets, but it is precisely this sensitivity that leads to twitching when the market gets into a sideways trend. However, we are very enthusiastic about using the ADX as a derivative of the DMI as a filter to help select the most successful trading method for each market at any time. Using ADX We suspect that the ADX indicator is often neglected due to the obvious drawback of its lack of correlation with price movements. Someone examining the ADX rising in passing while prices are falling could conclude that the indicator gives false signals about the direction of the market. It is critical to properly understand from the start that the ADX alone does not tell you the direction of the market. The ADX can fall when prices are rising and rise when they are falling. The purpose of the ADX is to measure the strength of a trend, not its direction. To determine the direction of the market, you must use additional indicators such as DMI. Some technical analysts attach great importance to the ADX level as an indicator of trend strength, and they would argue that a value of 28 indicates a stronger trend than a value of 20. We have found that the direction of the ADX is much more indicative than its absolute value. A change upwards, for example from 18 to 20,shows a stronger trend than a negative change from 30 to 28. A good basic rule of thumb could be formulated as follows: as long as the ADX is rising, any ADX value above 15 indicates a trend. We recommend you become familiar with ADX and use it in conjunction with your favourite technical indicators. You will soon discover certain levels of rising ADX produce outstanding results with your favourite indicator. One indicator works well when the ADX rises above 15, and another works well when the ADX rises above 25. When the ADX begins to decline at either level, it is an indication that the market has gone sideways and is forming a sideways trend. We'll explore the significance of rising and falling ADX in more detail and suggest suitable trading strategies. Rising ADX A rising ADX indicates an advancing strong trend and suggests the incorporation of trend-following trading strategies. Technical indicators that need strong trends, such as moving average crossovers and breakout methods, to generate large returns should work very well. Almost any trend following method should produce excellent results in a favourable environment, predicted by a rising ADX. Keep in mind that a rising ADX also provides valuable information about which trading technique might fail. Knowing what not to do can be just as important as knowing what to do. For example, popular trading techniques use overbought/oversold oscillators, such as RSI or stochastic oscillator, and look for sell signals when the market is trading at overbought levels. However, if the ADX is rising steadily, it should serve as a warning that a strong uptrend is underway and the oscillators' sell signals should be ignored. When the ADX is rising, overbought/oversold indicators tend to approach one extreme or the other and remain at that level, giving repeated signals to trade against the trend. If you follow the oscillator signals, the losses can become very significant. The fact that the ADX is rising does not necessarily mean that we cannot use our favourite oscillators. It simply means that we must accept signals going in the direction of the trend. A falling ADX Falling ADX indicates a non-trending market, where we should use a counter-trend strategy instead of trend following techniques. Overbought or oversold oscillators, which give signals to buy on troughs and to sell on rises, are the preferred strategies when the market is in such a trading corridor. Indicators such as the stochastic oscillator and RSI should give correct signals when the price is fluctuating within the limited area of its trading range.Due to the fact that buying on troughs and selling on uptrends produces very modest returns at best, many traders prefer to trade only in the direction of the major trends. In that case, it would be best to simply ignore trend-following signals while the ADX is falling. Of course, ideally one would like to have a profitable counter-trend strategy in addition to a trend following strategy, and apply each method in line with the direction of the ADX. ADX Problems: Spikes We would be doing a bearish disservice by claiming that ADX will solve every problem a trader can encounter. ADX also has its own disadvantages. One problem is that on long periods (we prefer 18 days, as mentioned earlier), which are best applied to most markets, the ADX suddenly changes direction, taking the form of a spike. Spikes usually occur at market peaks when prices suddenly shift from a strong uptrend to a strong downtrend. The source of the problem with the ADX is that it cannot correctly recognise a new downtrend. ADX will still include in its calculations a historical period with a strong move in the positive direction, while at the same time taking data from a new period with a strong move in the negative direction. As a result of the input conflict, the ADX will fall for a while until the old movement in the positive direction is squeezed out of the data, at which point the ADX will begin to rise again due to the new downtrend. In a market that has produced a spike, the ADX may not alert to the trend in time, preventing it from catching much of the rapid downtrend.We will try to find a solution to this problem. One possibility is to switch to a shorter ADX period when the market is at a level where a spike can be expected. We have noticed that some markets often produce spikes (such as metals and grains), while others tend to produce flat tops (Treasuries and securities). ADX does very well on flat tops without the kind of problems that arise on spikes. We would prefer to refrain from any subjective classification of markets, if at all possible, so we continue our search for more objective solutions. Fortunately, market troughs rarely take the form of spikes and the ADX does a very timely job of identifying uptrends as they develop. ADX problems: Lagging One characteristic of the ADX that can turn into a problem is that it is slightly slower than many other technical studies. When the ADX begins to rise, many trend-following indicators will already give a signal to enter. For example, +DI and -DI will cross before the ADX begins to rise. It is more than likely that at the time of this early entry signal, the ADX was still falling, so the entry will need to be ignored. In practice, in this situation, the rising ADX becomes a signal of timing to enter the market in the direction of the trend. Faster technical studies are able to determine the direction of the trend, and the ADX is used to set the time of entry. During a trend, faster indicators can provide additional entry signals which, if the ADX continues to rise, must be followed. You will find that some thought and planning will be required to coordinate the ADX with other technical tools.We view the delay as a small price to pay in order to avoid the costly twitching that can occur if you enter a trade during an ADX deviation. However, the lag time can be set depending on market characteristics and individual trader's preferences. A few markets are more likely to be in a trend than others. For example, the currency markets have moved well over the last few years. In markets which have been trending well, the time frame of the ADX could be shortened to produce faster signals. If lagged entries are frustrating for you, shorten the ADX time frame. If twitching frustrates you, keep the ADX period at 18 days. Lagging is not a problem when using a counter-trend strategy during an ADX drop. Day Trading with ADX Perhaps due to distortions caused by large gaps between yesterday's close and today's open, ADX does not work as well when applied to charts with a period of less than one day. Using a 5-minute chart and ADX with a period of 12, the gaps between the open and close can be wiped out after an hour of trading, and the ADX will give the usual first hour trend strength information. However, many day traders prefer to use 20-minute or 15-minute charts, in which case it is difficult to avoid possible DMI and ADX distortions caused by gaps between the close and the open.More often than not, the standard 18-day ADX can provide valuable long-term information which helps in day trading. The day trader should pay attention to the presence of any trend indicated by a rising ADX, and only enter short-term trades if they are going in the same direction as the trend. When the ADX is falling, short-term trades can be held in either direction. Almost any day trading method can be improved by first checking the ADX to determine if a trend exists.In short, we consider the ADX to be one of the most useful technical indicators. When we trade our management programmes, we usually look at the ADX first before performing further analysis. We find that the trend measure extracted from the ADX is an invaluable guide in choosing the best strategy for each market. The simple but important information provided by the ADX allows us to increase our winning percentage in trades by a significant amount. Many of our trend-following results tests only show the importance and value of the ADX when it rises. Waiting for the ADX to rise often means a delay in relation to our desired entry time, but the belief in mandatory trading success combined with the obvious benefits of reducing the number of losing trades is a more important reward.In addition to its usefulness on entries, the ADX can be an exceptional help in timing exits from trades. An important pattern noted by Wilder is the possible short-term top or bottom, heralded by the intersection of the +DI, -DI and ADX lines. A market turning point often occurs when the ADX line first turns down, after the ADX crosses first +DI and then -DI from below. We agree with Wilder's conclusion that this downward pivot could be a good time to lock in gains following the trend, or at least close most contracts that are part of a profitable multi-contract position.The ADX can be very useful to exit in a different way. When the ADX is falling, it shows that we should take a small income instead of letting the income flow in. When the ADX is rising, it shows the possibility of large returns and therefore we should refrain from exiting prematurely. Having an accurate indication of when to take small profits and when to expect large returns can be a huge advantage to any trader. This rarely mentioned use of ADX can be just as important as its use in choosing an entry technique.
09.04.2021
IndexaCo
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Profit - CCI
Profit - CCI Commodity Channel Index (CCI - Commodity Channel Index) The Commodity Channel Index was first described by Donald Lambert in the October 1980 issue of Commodities (now Futures) magazine. Despite CCI's 11-year history and its presence in almost all futures-oriented software packages, we know of few traders who actually use it. We do not know why, but we suspect that one of the reasons may be the lack of literature on this indicator, as well as Lambert's insistence on binding CCI to the theory of cycles. Despite the references to cycle theory, Lambert's original article is probably still the most accessible explanation of how to use CCI.Like most technical studies, CCI requires some understanding of its origins in order to be used effectively. The mathematical and statistical concepts behind CCI are a bit difficult to understand when first examined because its formula is more complex than RSI, MACD and the stochastic oscillator, which can be more or less intuitively understood. The CCI formula is partly statistical, which makes it difficult to show the relationship between the price change charts and the resulting indicator charts.The CCI formula creates a usable number that statistically indicates how far recent prices have moved away from the moving average. If prices have moved far enough, a trend is established and a trading signal is generated. We tend to divide the technical studies into two groups; those which are best used as counter-trend indicators, such as the RSI and the Percent R, and those which are good at following the trend, like the moving averages. The CCI is an indicator which follows the trend. An overview of Lambert's basic theories The CCI formula calculates a simple moving average of the average daily prices [(peak + trough + close)/3] and then calculates the average deviation. The standard deviation is the sum of the differences between the average price of each period and the simple moving average. The average deviation is then multiplied by a constant (Lambert suggests 0.015) and divides the difference between today's average price and the simple moving average. The result is presented as a single number, which can either be positive or negative. The trader can change the number of periods, which are used to calculate the simple moving average. As you might expect, shortening the time span makes the index faster and more responsive to small market movements, while lengthening the time span slows down the index and smooths out market volatility.On a computer screen, the CCI is usually displayed as an oscillator or histogram, which oscillates in different directions around the zero mark. Since the index measures how far prices have moved away from the moving average, the CCI allows us to measure the strength of a trend. In theory, the higher the value of the CCI, the stronger the trend and the more profitable the trade should be in the direction of the trend. Lambert originally developed the CCI to find the beginning and end of supposed seasonal cyclical price patterns. He felt the need to have an indicator that would identify where cycles start and end. This seems like a clear contradiction to cyclical theory, because if you know there is a cycle, you must know where it starts and where it ends, otherwise there is no cycle. The obvious need for an indicator like the CCI shows that imaginary cycles must have been completely uncontroversial and unrepeatable.Lambert made the moving average part of the formula modifiable so that the user could somehow adjust the CCI to the intended cycle length. His research showed that for best results, the moving average used in CCI should be less than one-third the length of the expected cycle. But the test results tables in the article showed that the five-period moving average performed best, regardless of cycle length (another indication of the weakness of Lambert's cycle assumption).CCI uses a simple moving average instead of an exponential one so that prices of the distant past will be discarded and will not affect the results. Some arbitrary constant of 0.015 used in the CCI formula has been added to scale the index so that 70 to 80 percent of the values fall into a channel between +100 percent and -100 percent. Lambert's premise was that fluctuations between channel boundaries were considered random and had no trading value. He suggested going long only when the CCI was above +100. A significant drop below +100 is considered a signal to exit a long position. The rules for a short position are the same: sell below -100, buy back above -100. As we mentioned earlier, Lambert did research which indicated that the CCI period length should be set to less than one third of the cycle length. He tested a number of different period lengths, ending with 20 as the standard number, but suggested that this number should be adjusted for each market individually. (We do not dispute that the period length should be set in such a way as to satisfy the historical data.) Twenty is the default value for CCI by most programs. Some positive test results Colby and Meyers in their book "The Encyclopedia of Technical Market Indicators" tested the CCI on weekly prices of the New York Composite using the original trading rules. This procedure seems to be a curve fitting, but their results are interesting. The most profitable time period tested turned out to be very long - 90 weeks. However, anything between 40 and 100 weeks gave good results and could easily be as profitable today as the 90 week period. Our caveats regarding optimisation can be found in chapter three.Colby and Meyers pointed out one important aspect of the 90-week CCI that should not come as a surprise. CCI on a 90 period almost always misses the early phases of an incipient trend. In today's stock market, skipping the early phases of a trend often means missing out on much of the potential return. Lambert's early research showed that the shorter-term CCI would be a leading or coincident rather than a lagging indicator, and Lambert used a time period of 5 to 20 days. To regulate the time lag produced by the 90 week CCI, Colby and Meyers decided to ignore the +/-100 extremes and use zero line crossings to produce earlier entry and exit signals. They called this indicator the "zero" CCI and found it much more advantageous than the original +/-100 signals. As an aside, note: even though when testing a trading system using the concept of zero CCI on weekly NYSE Composite data, Colby and Meyers got better results than the popular 39- and 40-week moving average systems now defended by many stock market traders, this does not mean anything yet. Using the CCI as a long-term trend indicator The monthly CCI can be very effective as an indicator of long-term market trends. Take a look at the following monthly charts with CCI signals with a period of 20 on the zero line instead of the +/-100 mark.The first chart is for the Japanese Yen. In addition to the sequence of trading signals there are two other noteworthy features of this chart.First, the faster the rise in the CCI from 0 to 100, the stronger and more decisive the trend it has detected. Second, the faster the fall in the CCI after it reaches 100 usually means that the trend is losing its strength and that profits should be protected by a halt at this point. On the treasuries chart we should note the use of CCI trend lines for early exits.We recommend trying to use a monthly CCI with a period of 20 for a longer-term directional move, while using a shorter-term indicator to set entry and exit times in the direction of the monthly trend. This strategy should be particularly effective during a rapid rise in the CCI from 0 to 100. After the monthly CCI peaks, it would be wise to consider suspending trading in this market until the CCI starts rising again.A situation similar to the monthly CCI can be seen on the weekly charts. A quick rise from 0 to 100 should definitely indicate an established trend. Try using the weekly CCI to set trading times in the direction of the monthly charts when the CCI is in a rising period. Exit when the weekly CCI makes a peak or when another indicator warns you that the intermediate-term trend is losing strength. An alternative strategy is to start trading small lots when the zero line is first crossed and then add positions as the CCI accelerates and the trend strengthens. Start closing positions when the CCI stops, indicating that the market is ending the move.Trading multiple positions based on weekly charts will obviously work best in markets with slower movement and controlled risk, where large long-term positions are preferred. Using the daily CCI Our research has shown that the 20-day CCI, used on its own, does not work well in most markets. Its main drawback of missing the beginning of strong trends can be a really negative trait in fast and volatile markets. This slowness can be overcome by using the 10-day (or even shorter term) CCI or by entering at zero. But faster methods become extremely vulnerable due to frequent twitching. We can always set the CCI to meet each market, but we are pretty sure it is just tweaking the curve and do not recommend this method.We recommend combining the CCI with another indicator for daily trading. Because one of the problems with the CCI is its tendency to err in estimating the volatility of trending markets, it seems logical to look to the DMI/ADX as a duplicate trend indicator. If the ADX is rising, then the market is in a trend, and it can begin to trade on the signals CCI. If the ADX is falling, then the market is volatile and should not be traded, at least not with a trend-following indicator such as the CCI. Exit after the CCI creates a peak and moves further towards the zero mark. An alternative exit strategy could be to use stops on the last peaks or troughs after the CCI correction has begun. Our testing has shown the usefulness of each of these basic approaches. A few observations Our research has shown that in a general sense CCI is a tool, in many ways similar to ADX, which can help in assessing the overall trendiness of the market. As we pointed out earlier, the faster the CCI rises, the stronger the market is trending. While it is mathematically possible for the CCI to move upwards when the market is not trending, this is unlikely in practice. Remember that the CCI can provide traders with important information even when it does not provide entry signals. If the market stays inside the +/-100 range most of the time, it shows no trend, so you should avoid this market or use a counter-trend strategy.We have found that the best markets to trade are those where the CCI has recently produced spikes multiple times, protruding beyond 100 in one direction. We have also observed that first trades against a set CCI trend are usually very unprofitable. If the market has been trending and showing a series of CCI moves on one side of the 100 range as we have just described, do not reverse your trading direction on the first CCI move that breaks the 100 mark in the opposite direction. A short pass to the opposite side of the range is probably an opportunity to add a new position, not a demonstration of a trend reversal.  Avoid jerking We have also seen that our often-recommended technique of waiting for confirmation after a trading signal is an exceptional method of avoiding most of the jitters when using CCI with a faster period. We have found that when CCI generates spikes after the +/-100 level, it is almost always better to wait for signal confirmation before making any moves. When the CCI rises above 100 wait for the market to produce a significantly higher close before buying. We have noticed that much of the 100 level breakout has only turned out to be a one or two day event, especially on the shorter term. The entry confirmation technique avoided most of the twitching and at the same time caught all the big moves. The confirmation technique also allows us to switch to the faster CCI we need to overcome the lag problem without getting caught in the twitching as one might expect. For example, a 10-day CCI with a confirmation requirement will produce much faster signals and probably produce twitching less often than a 20-day CCI applied in the normal way.
08.04.2021
IndexaCo
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On the world's financial markets and stock exchanges. Part 10
On the world's financial markets and stock exchanges. Part 10 The main purpose of the lecture: lies in the short but very succinct phrase of the famous Jesy Levermore: "There is a time to buy. There is a time to sell. And there is a time to go fishing".Psychological basics of stock trading  Why does the price change? Because the relationship between supply and demand is changing. Why does it happen? Because an event occurs.A chart is nothing but a market reaction to an event. The reaction is a behavior (which is what psychology studies). Thus, studying the price change chart is the study of behavior (psychology) of market participants.How will a person behave in an extreme situation? For this you need to know the character, sex, upbringing, etc. But in another situation a person will behave differently - the experience will affect it! But in a crowd reaction to events acquires certain patterns - the crowd is primitive. A diagram shows the crowd behavior patterns and they are subject to prediction. What guides us?Desires are acquired feelings. Instincts are inherited from birth and are subdivided into: SexualSelf-preservationNutritionalHerdThe herd instinct contradicts all the others. That's why trading is a process of self-discovery and an obligatory personal experience. The main purpose of the market is to inform, namely to communicate your wishes to others, and then to inform you and the world of the answers to your wishes, whether they bring you gains or losses.Being a good analyst is difficult. Being a good trader is even harder. Many think they will get rich as a smart, computer-literate person or because of past success in business, you can even buy a mechanical trading system - it's like sitting on a chair with 3 legs, sooner or later you will fall down, because there is no 4th leg - psychological preparation and money management.The question of choice: who to live with, where to work, what markets to trade - answers for many appear by accident, without much thought - no wonder many are unhappy. Trading is a process of self-discovery and an obligatory personal experience. The main purpose of the market is to inform, namely to communicate your wishes to others, and then to inform you and the world of the answers to your wishes, whether they bring you profits or losses.Pros and cons of stock trading:+ freedom in time and space, independence, interest- psychological burden, risk.Question: Do you really want to make money in stock trading, or do you want the thrill of it? The thrill of trading may be a loss as well as a gain.Mostly they come from the process itself (from riding fast)short-term exhilaration from the thrill of trading The psychology of the market A market is nothing more than an agreement in price and a divergence in value. No deal is made until there is a discrepancy in value and an agreement on price. We buy government bonds when we prefer to have government obligations instead of holding the money that is paid for them. Our fantasy (trading is a fantasy game, but more on that later) is that the "value" of the bonds will increase. We buy them from some unknown trader who is convinced otherwise. Namely, that their value will go down. We have a clear disagreement about today's value and future value, but we agree on the price.The market is the perfect mechanism for determining the true price.But psychologically, price and value are linked by a rubber band a mile long - the market swings on it.The search for and determination of the exact price takes place in a market where at every moment there is an absolute balance between the energy of those who want to buy and those who want to sell. The social purpose of artful investing is to defeat the dark forces of time and ignorance that envelop our entire future. The real, private goal of the most skillful investing today is to "outdo anything and everything," as Americans well say about it, to outsmart the crowd, to slip a bad or devalued coin to another. So in defeating the dark forces of time and ignorance, we are left with the alternative of submitting only to our personal and subjective hunches. And these, of course, are intertwined with our personal and subjective emotions such as hope, fear and greed. The basic rules of the market:Rule 1: market ahead. The combined acumen of all current and potential investors is usually greater than that of a single individual. Is it possible that "others" know something we don't? We can never be sure of that. We would have to agree that it is a risky task to stay ahead of the knowledge of the entire market and disregard this market knowledge of prices in advance.Rule 2: The market is irrational.The market can react quickly to the facts, but it can also be subjective, emotional and subject to just one whim of changing trends. Sometimes prices can fluctuate according to the financial situation and interests of investors, wandering between mass hysteria and indifference rather than between securities rates. Consequently, the private investor's attempts to be sensible may in fact prove to be absurd behavior. (Try opening a position before the American session on the Euro/Dollar pair)Rule 3: The environment is chaotic. Macroeconomic forecasts are usually too imprecise to be of any value to investors, and that's because economic correlations are constantly being affected by small but significant factors which no one can predict or estimate, but which can change everything. Even worse: the same is true of financial markets.These three rules have been around as long as markets have existed, and yet very few people understand what they mean. But today we have a fourth rule, formulated by technical analysts who use charting in market analysis: the rule states that these charts are self-fulfilling. If many people draw similar lines on similar charts and equip their computers with a homogeneous decision-making system, the results will be self-fulfilling. Rule 4: Graphs are self-fulfilling. If many people use the same charting systems, they can make profits on their trades, regardless of whether they are actually right.Factors that additionally play against us: the market is organised in such a way that many people lose moneyCommissions and price differencesEvery trader is responsible for his own behavior. An indispensable component of maturity is the ability to sort oneself out and approach the choice of activity responsibly. The consequences of an immature decision or flirting with trading can include psychosis, increased neurosis, exacerbations of disease, and even suicide. On the other hand, the decision to go into trading, as a happy epiphany of a mature mind, promises priceless treasures, and it is not just about monetary gain. Markets today are the most accurate and sophisticated psychological monitors in the world. Trading may prove to be the most accessible and effective psychotherapeutic program in existence if handled properly.  Trader's Psychology. From defeats to victories!  The average trader experiences serious stress when trading the markets. This raises the following questions for traders:How can I enjoy and profit from trading on markets at the same time?Why do I enjoy it so much if it often leads to disappointments (losses)?How do I maintain inner harmony and peace of mind - mine and those close to me - in the raging whirlwind of the markets?How do you cope with nerves and worries, constantly being in an atmosphere of danger and risk?Why do many traders/investors constantly lose money?How do you find reliable brokerage companies among the many ones that offer their services? Emotions Those who treat trading calmly, and not engage in it as in a battle to the death, those who look beyond their losses and master the art of "dancing with the market", are constantly winning. The key to a good dance, i.e. making a profit on the market, is the ability to relax and simply move with the flow. Dancing with the market means moving with the flow of the market - up, down or sideways with a sense of harmony, trust, gratitude and, even love. To dance really well and enjoy the process of dancing, you must allow yourself to move to the beat of the music, not according to a pre-determined plan.How can you treat a person?As a partner, friend or girlfriendas an enemy or rivalas an object (neutrally)lovinglyHow do you view the market? - Neutral! The market offers a host of temptations and the market creates a thirst for new acquisitions and a fear of losing what we have gained. These feelings disturb our appreciation of new opportunities:your feelings have a direct impact on your accountWhen you're in the market, you're up against the best minds in the world. The field of your game is designed for you to lose; if you let your emotions interfere with the process, the battle is over.After winning many feel like geniuses (it feels good to feel so smart that you can break your own rules and win!) Such players go into self-destructive mode, abandoning their own rules, then they take revenge on the market (there are many examples of leaps from riches to poverty and back).The sign of a successful trader is the ability to build a fortune! Beliefs To dispel doubts, we need to understand the game we are playing. This game is a competition of our own beliefs. If we want to change our results, we must change our beliefs. Beliefs are what we believe to be true. We almost never question our own beliefs, but that is what a loss-taking trader must do: assess their own beliefs not only about the market, but also about themselves. Few traders know why they trade, far fewer know how they trade. We all usually give superficial reasons: to make money fast, for the fun of competing with other traders, for the prestige of the profession, etc. Having made your last trade, what caused you to lose - because you didn't guess that the market would move the other way, or because of an underlying, unexamined belief that you can't get rich that easily? If the reason is the latter, it's time to get rid of some old beliefs. How do you free yourself from your beliefs?Understanding the difference between process and content is very important for success in the market. Generally speaking, we've been taught to be goal-oriented, prioritising, evaluating what's more important than that. We make lists of our goals, plan for them, and then neglect the present and mentally live in the future. The abnormality of living in the goal space rather than the present moment space is that we focus on the future and cannot control or even be aware of what is happening now. We cannot trade well while we plan how we will trade tomorrow. Living today is a prerequisite for good trading. Pay attention to the process, not to future goals and desires. One way to live for today is to make sure that all (or most) of our beliefs are based on "grounded versus unfounded" assessments. This is not an economic, fundamental, technical or mechanical approach. It is a behavioural approach using information generated by the market.We traders are usually influenced by our latest mistake and do not pay attention to what is happening in the market at the moment. In other words, we base our beliefs on our past circumstances, and any incoming information will be filtered so that it does not conflict with our beliefs. If reality conflicts with our beliefs, we will deny reality and distort incoming information in an effort to preserve our precious beliefs. It is no surprise that we fail in the market, having been exceptionally successful in other professions. In the market, you either face reality or suffer losses.It's easy to make money on the stock market! Changing your beliefs is not easy!DisciplineMaking money is easy if you understand the basic structure. It's also easy because the market itself becomes the ultimate teacher. It will always tell you exactly what to do and when to do it. If things aren't going well for you, it will correctly point out where you went wrong and what you should have done. A great teacher, the market gives way to no one and is always eager to show you how to act.To tune in to the market you must make your goals less stringent!Contrary to the claims of all-knowing gurus, we downplay the importance of the present whenever we set goals. In the market, things don't always work out the way we want them to. We don't enjoy getting ready to trade in the market if we worry about possible losses. We don't enjoy spending time with our children if we worry about their future. We don't enjoy maturity if we worry that illness may suddenly rob us of the joys of life. We deprive ourselves of the joys of free flight, of enjoying the rich opportunities that life and the market offer us, here and now.If you set yourself up for a certain trading result when you are bidding, you lose "elasticity". If, on the contrary, you loosen up, open your heart, you enter a state of flow. Question: How can you trade without having a goal?Answer: define as many goals as you want. Then do the necessary preparatory work and then - work until you reach your goal. When you are satisfied that you have made the most successful trade so far, leave the market alone and wait for the result.Example: "If you were a farmer, and farmed the way you trade, you would plant seeds and then come back every day to dig them up to see how things are going. Once you've decided to do the trade, let the fruit grow and ripen and then reap it. Stop digging up the seeds."If you are anxious, you are at the mercy of a bad habit. If - honestly - you are not, you are trading well and you want what the market wants. Whenever you are anxious, you want what you want, not what the market wants. The market is neutral. It does not know or care about what you want.Most traders confront the purpose and function of the market and therefore incur losses. Picking tops and bottoms is inconsistent with the nature of the market. A jumble of conflicting indicators united by the power of greed is the worst tool for trading the market. We don't need a new indicator or strategy. We need a new experience - a new sense of what should be born in the right hemisphere and an intuitive understanding of the market.Important characteristics for success in trading the financial markets, according to traders themselves:Reaction speedDisciplineExperienceFocusStress toleranceWillingness to take risksIntuitionEmotional stabilityAbility to work in a teamAbility to process several types of information simultaneouslyAbility to correctly evaluate information sourcesLearning abilityCommunication skillsIntegrityIndependenceAnalytical thinkingAggressivenessOptimismMathematical abilityCuriosityOrganisational skillsComputer literacySocial skillsNow compare with the personal success factors. According to the 100 largest investors and investment managers, active and successful in the financial markets for more than a yearDisciplineQuick decision making ability (stress resistance, aggressiveness, willingness to take risks)Understanding of the marketEmotional stabilityAbility to process informationDemanding integrity (inquisitiveness)AutonomyInformation processing (computer literacy, social skills, mathematical ability)Most traders spend most of their time expecting a good gamble, but once they have entered the market - they lose control - an essential element is missing, which is controlling emotions! If your mindset does not match the market, if you ignore changes in mass psychology, then you have no chance of winning! You need to be able to focus on reality, to see the world as it is.  There is an opinion that the Market is a game for men? Because 95% of active traders are men, but the number of women is higher among corporate traders and women are more successful. Stock market game is like an extreme sport - only 1% of them are women. Men gravitate to risk, the more monotonous their work, the stronger their desire for extreme sports. But experienced extreme gamers die more often, because they take more risks.You can succeed in the stock market if you treat it as a job. Emotions are death!For a long time, zoologists have wondered why gorillas don't breed in captivity. It doesn't mean they're not sexually active. It turns out that this is because they do not have the right conditions for it. All animals need a sense of danger to get a taste of life. If there is no risk, we try to create risks artificially, because risk and the feeling of life are two sides of the same coin. Risk is incentive to live. Life without risk loses its meaning and value. Today we don't know where to put this free time, and we have lost the opportunity to struggle. Most people fill this gap with television, but you and I can fill it with market work. We have to understand, firstly, what our needs are, and secondly, how they relate to the market. We have to make choices every day, come to terms with the results and gain experience. Risk is the trigger in life.The actual reason why most traders are constantly making losses is because they are working with new information using old, inappropriate categories. There are only two kinds of working with new information:Changing it (distorting it) to the extent that it conforms to the old organisation. Allowing new incoming information to self-organise, taking other, new and unpredictable forms of organisation.This is the difference between a successful approach to trading and another - more widespread - approach that leads to losses. Traders who allow new information to organise their trading will act in sync with the market, making them winners. Trying to align new information with old categories distorts both the information itself and the trade. The Psychology of Loss If we briefly describe the "road to ruin", it goes something like this:Specialize in a small number of markets and trade only in them all the time.Get information about these markets from random tips, hearsay and good advice from friends and taxi drivers.Trust the information you want to hear to a greater extent.Adjust the information so that it confirms what you have done.Buy when your neighbour and everyone else is buying and sell when the market has crashed.No one likes to be out of the market, especially selling short. So most of your time you think the market will go up.Make sure you get a huge amount of scrappy information and never important information in perspective.Improve the practice of looking at prices in breakdowns (on computer screens, in stock lists) instead of studying them in perspective .Don't create a policy of potential losses and take advantage of the huge opportunities that appear in the market.Close long-term investments in a week's time because they have already yielded profits ....And keep short-term investments if they have produced losses......renaming them as "long-term investments".Or instead using an inverted pyramid structure when things are going well. Replenishing stocks to "improve average performance" in a downtrend.Use the same tactics whether the market is trending, in a consolidation zone or performing a trend reversal.Move stop-loss orders when the market is going against you, because you are hoping for a reversal soon.Relying more on the opinions of others than the facts themselves.Use market prices as your main criterion for determining fundamental value.Hide losses by hedging instead of taking them.Evaluate each investment individually.Forgetting that this financial market is the cruelest in the world.If you don't know who you are, the market is too expensive a place to find out.  Psychology of personality We all trade on our own core sets of beliefs. Trading success has little to do with price and time. From our point of view, markets are not economic, fundamental, technical or mechanistic - they are behavioural. Markets are made up of traders with all the variety of their timing, levels of preparedness, amounts of capital and goals. That's why at times markets seem to us very much like a person - then angry, then irritable, then confused, then moody, then alert, or even drowsy.Let us ask ourselves the question and try to answer it honestly ourselves: "Why play in the financial markets?"It`s freedom, it is chess, a preference and a crossword puzzle at the same time (many participants are singles).Achieving self-realisation.Many have an intrinsic need to achieve excellence, but the best are hard working people and the goal of a professional is not to make money, but to work competently and confidently. Winning should not make you happy and losing should not make you sad. The problem with self-realisation is that people are inherently self-destructive, while the market offers unlimited opportunities for both, and those who have no peace with themselves satisfy their conflicting desires in the market.What should be done? Fix in your mind the fundamentals of trading.I have come to trade for life!Take your time! It is easy to lose money!You must develop your trading system.Always remember about money management.Always remember - that the weakest link, is the trader himself!If you do not know what you want, you will appear where you do not want to be. It is necessary and sufficient to want what the market wants. Fantasy and reality of the market The successful player is a realist. Only losers act based on fantasies. Here are some universal fantasies of market players: The myth of intelligence or trading without a head.It is not terrible to make mistakes - it is bad to make them again! If you make a mistake for the first time - it means you live. You search, you experiment. If you repeat mistakes - it is a neurotic syndrome.I lost money because I didn't know the secrets (a demoralized player gets money and buys secrets)from an intellectual point of view the game is very simple (you need cunning and cleverness)Blame the broker, the Guru, the news.Self-deception.When the pain builds up slowly and gradually - the natural reaction is to endure and wait for improvement. The dream trader also holds a losing position, hoping that the course will change in the right direction.The myth about insufficient capitalOften market carves out stops and moves onlosers take market trends as a confirmation of their conclusionsamateurs do not anticipate losses and do not prepare for themThe myth of autopilot.Try driving a car on cruise control during rush hour on the main highway of a major city. It won't work for you.Autopilot enthusiasts are trying to relive their childhood experiences - their mothers fed them, fed them milk, gave them warmth and cared for them, taking full responsibility for them.You cannot count on the goodwill of the marketCult of personalityMany people pay lip service to independence, but when they get into a bind they start looking for gurus.Every trader should have 3 basic componentsA realistic personality psychology.Always most failures in life are caused by self-destruction and one should not look for various reasons everywhere, the reason is in oneself.A logical working system.To change, you need to find the reason (keep a diary, analyse trades, work through mistakes)A money management plan.Almost all professions provide insurance for participants (your boss, a colleague at work can warn of wrong behaviour - in the stock market game there is no such support) Self-destruction must be controlled, a psychological insurance (money management rules) is necessary. Those who do not learn from their mistakes will relive them.
07.04.2021
IndexaCo
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