Author Topic: Trader's Journal  (Read 995 times)

Bevan

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Trader's Journal
« on: July 14, 2020, 11:11:03 am »
Having some time on my hands again, being winter and all, I thought I would do a weekly (or thereabouts) post on some trading advice. Hope some people might find it useful.

First, some background... I co-founded the global coal market around 1998 in London, UK, becoming essentially an online coal (commodities) broker at the time. Later I moved into trading commodities with a couple of investment banks, returning to South Africa in 2008 post the credit crunch. I now run Thrive Centre in Hogsback where we make compost, grow awesome organic food and teach people how to become self-sufficient. I also run African Source Markets which is commoditising strategic African commodities in much the same way that globalCOAL did. For reference I've traded FX, commodities, stocks, swaps, futures, options and several other private variants as part of corporate finance deals.

I find financial markets (alongside religion) one of the most amazing concepts invented by Homo Sapiens to date. However, I just wish that we could all get our egos in check and learn to live in harmony with Nature, instead of raping her for profit, without accounting for any externalities, although I think that movie is still playing out as climate change starts to make itself felt. Anyway, on with the journal...

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Bevan

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Re: Trader's Journal
« Reply #1 on: July 14, 2020, 11:24:43 am »

In any market we need to understand that there are different timelines operating...
a) The long term, passive investment funds (like Patrick  ;) ) who have no option but to religiously invest their cash in the market every month. Consider this as akin to a 200 day moving average line.
b) The medium term professional investors (investment funds, hedge funds, professional traders), who rebalance investment portfolios quarterly or monthly. Consider this as the current flowing in an ocean. We model this using the signal line (red line) of the MACD indicator i.e. Moving Average Convergence Divergence.
c) The short term traders (including bots, scalpers, option delta traders, amateur day traders etc) who are in and out of the market regularly. Consider this as the wind blowing across the ocean. We model this using the MACD (blue line) of the MACD indicator.

We also need to understand that any market has an inherent stretchiness to it. Think of an elastic band being tight or loose. This stretchiness is a measure of the daily volatility that any market can bear and is nicely illustrated by Bollinger Bands, approximated as the standard deviation. Of course markets will often stretch beyond their band, but its usually only temporary.
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Bevan

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Re: Trader's Journal
« Reply #2 on: July 14, 2020, 11:38:57 am »
Now let's look at Bitcoin ("BTC") to start with.... We start with a monthly chart to get an overall helicopter view.

We can see that we are easily within the Bollinger Bands, indicating that monthly volatility is way down from previous levels. This therefore gives us no indication of price.

However, in the MACD chart, we can see that both the MACD line itself (blue) and the signal line (red) are in positive territory, and have been for the last 3 months i.e. 3 green bars of late. When the current (signal line) and the wind (blue line) are moving in the same direction, and especially when moving in same direction as the long term 200-day MA, then we expect strong moves in that direction i.e. similar to strong, rolling swell in an ocean. When current and wind are opposite to each other then we should expect choppy, sideways price action.

Even though the bulls are clearly in charge in this monthly view, we see that price action has been weak and has failed to break above the 10,000 level again. We also note that an average run above or below the signal line is about 6 months, and we are in the 3rd month now. To me this indicates that BTC is quite a tired market, with many participants having given up on it.

It's inevitable that momentum will break down once more and when it does, we could see major capitulation from buyers finally throwing in the towel. However, for now the monthly chart is telling us to probably hold onto any long position, if already long. For any new position, it's too early to short and probably not wise to go long this late in the cycle.
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Bevan

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Re: Trader's Journal
« Reply #3 on: July 14, 2020, 11:48:59 am »
Let's now check out a daily chart, for a more granular interpretation....

Here we see MACD breaking down over a rising signal line, although the signal line is nominally in negative territory still. As a scalper one might be tempted to short BTC at this point, but for me this is tricky. This is a situation where the wind is now blowing across the swell, creating choppy sideways price action.

Judging from the last few weeks of price action, I don't like the downside potential here anyway and the daily Bollingers are really close as well.

As one should always be looking to trade less, thus saving you precious brokerage costs, going short now is not great risk:reward trade. Capital and margin is probably best employed elsewhere for now. However, BTC looks to be setting itself up for a great short trade in a little while. One to keep on the watch list for now....

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Patrick

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Re: Trader's Journal
« Reply #4 on: July 14, 2020, 01:00:46 pm »
Following with interest. Not because I want to try, but because I find it fascinating!

Bevan

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Re: Trader's Journal
« Reply #5 on: July 14, 2020, 02:53:04 pm »
Following with interest. Not because I want to try, but because I find it fascinating!

Great. Glad to hear. So here's one for the stock market which I think is at a pivotal moment right now....

On a monthly chart the Dow looks like it could be breaking up, with MACD moving in line with a barely positive signal line... However, we are mid-way through forming this month's price action. The end of 2007, after the initial CDO collapses, saw very similar stock market price action wanting to break up, before events overcame markets and we headed back down into the crash of 2008. We are also at a around the key psychological 50% retracement mark after the year's earlier price crash, and the rule suggests a return to the downside in this case.

The weekly chart sees the bulls firmly in the driving seat since early April, with both MACD and signal in positive territory, although this move is getting a little tired by now. So again, the next break should be to the downside but would not want to pre-emptively short the market here.

The daily chart is due for a downside correction any day now, although again, it's very very tough to short the stock market when it is continually being fed by stimulus cash, company buybacks and crazy Tesla investors etc.

Having said all that, it is earnings / reporting season now and this should bring some sense of where markets really are, aside from the hype. If we start to see negative readings then the market is wide open to the downside, possibly leading to a greater collapse. However,  we would need to see this fall happen by end July otherwise the monthly chart indicates that it's full steam ahead for the bulls again.

The best trade here would probably be an end of month straddle (options), as we are likely to see big price moves either way. But I will leave the more complex options trades for a later time.

The next two weeks is thus vital for the stock market, to determine if we crash and burn for a bit, or rise and thrive again.
« Last Edit: July 14, 2020, 02:57:33 pm by Bevan »
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marguerittereed

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Re: Trader's Journal
« Reply #6 on: July 17, 2020, 09:22:41 am »
Thank you... very interesting.

Tovad

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Re: Trader's Journal
« Reply #7 on: July 17, 2020, 09:41:46 am »
Yes thank you have confirmed what I have always suspected about Tesla investors....

Bevan

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Re: Trader's Journal
« Reply #8 on: July 20, 2020, 10:31:07 am »
Momentum has now broken downwards on the Dow. But before the bears get too excited we need to note that the signal line is still nicely in positive territory. This typically means a period of choppy, sideways price action i.e. as the wind blows against the current we get crosscurrent, choppy conditions in the sea.

The best strategy here is to sit on your hands, although short-term longs should probably be exiting their positions and taking profits. Note that we had a similar push downwards starting on 9th June, but that was under much more convincing bearish price action, with the steepness of the momentum fall much sharper. This one is more gentle although we need to see what today actually brings to the table.

We are still in this vital period before month end, which determines if we break upwards on a monthly chart, or shift back down again. That is the medium term trend that we want to be able to get on.
« Last Edit: July 20, 2020, 10:33:11 am by Bevan »
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Bevan

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Re: Trader's Journal
« Reply #9 on: July 20, 2020, 10:40:18 am »
Yes thank you have confirmed what I have always suspected about Tesla investors....

It's not just Tesla investors although Tesla is of course a well loved brand amongst millennials. Hey, if one can't own the car then at least own the stock...  :D  There's plenty of US companies that one is not sure will ever make profits, Netflix being another. Their spend per Oscar earned is mind boggling, and with competitors fast emerging they may already have reached "peak eyeballs". 

At least we can easily see what most of these young, "Robin Hood", uninformed investors are buying. Do they even know that Robin Hood sells their trading intentions to the pros, who get to front-run them? Do the millenialls even care? I suspect not, at least whilst prices are being ramped. Of the FANG crowd, it would seem that only Amazon has substance, although they too are probably hitting peak limits to growth and anti-competitive regulators are circling it seems.
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Bevan

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Re: Trader's Journal
« Reply #10 on: July 23, 2020, 02:17:31 pm »
Unlike many other markets, the stock market hardly ever gives you a chance to short it. Aside from the famed Plunge Prevention Team, we also now have Robin Hood traders, day traders, swing traders, bots, funds and of course the monthly splurge from the FIRE crowd, pension funds etc. This is all unprecedented stuff - nowhere in the history of markets has so much firepower been thrown at the market to make it go up. But of course when everyone is long, the speed and depth of the panic when crashes come will only get wilder and wilder.

The market rallied itself out of a fall the other day, and we are now pretty extended to the upside. We only have a week or so to go before printing a nicely positive upside breakout for the stock market on a monthly chart. It's pretty wild to think that by the end of August the market could be back at the level it started the year at, as if Covid never even happened. And yet, the US has thrown trillions of firepower into the market. Of course, with the red signal line now having reached zero, we could see a positive July, Aug and Sep, with a subsequent turn down in momentum come end of year.

Meanwhile, my favourite trade remains gold, although that is quite extended to the upside now as well. It's fascinating how gold and stocks have rallied at the same time - that hardly ever happens as they normally have quite strong inverse correlation.

Although we are due for a short term stocks correction, in the medium term it looks like we should see a good run towards Jan-20 levels on the Dow, at which point the market might get the wobbles again, depending on how Main Street is faring relative to Wall Street.
« Last Edit: July 23, 2020, 02:20:09 pm by Bevan »
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Bevan

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Re: Trader's Journal
« Reply #11 on: July 23, 2020, 04:06:29 pm »
Out of interest, something similar to today's monthly Dow pattern happened in 2008 before the financial crash really got going. In fact, the signal line (red line in bottom graph hasn't been negative since the 2008 crash. But in March 2008 the rally was not nearly so strong as it is today. Then again, those were the days just before QE became a thing.

I for one am generally happy to follow the crowds in this current market euphoria. However, I know in my bones that no nation can ever outrun its debt problems, from the fall of Rome to France and more modern countries. The US is wholly dependent on the USD being the currency that can buy the entire world's production, hence they don't have an inflation problem, even while running the monster of all deficits ever known. However, China is doing everything in its power to ensure that the USD is toppled. Then there is US social security which goes bust in a little under 10 years.

When, not if, the USD collapses and/or defaults on its bondholders, that will usher in the biggest financial crisis the world has ever seen. It's not going to happen tomorrow, or even in the next fear or two. There are still a few options allowing policymakers to kick the can down the road, although they are almost out of options now. In 5 years time the world is going to be a vastly different place.
« Last Edit: July 23, 2020, 04:13:24 pm by Bevan »
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Bevan

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Re: Trader's Journal
« Reply #12 on: July 29, 2020, 08:48:15 pm »
So, it looks as though stocks are going to keep pushing higher for now. We are about to end July and the monthly chart shows momentum breaking upwards into positive terrain. It may not be a dramatic move higher but I feel it's a fairly safe one now. See monthly chart... This is about to be confirmed by the daily chart also breaking upwards in terms of momentum. So we "should" see some strong moves upward shortly... Of course nothing is ever guaranteed and that's where trading discipline, stop losses, allocation of capital etc. all come in.

On the daily chart we can see the typical sideways movement in stocks, that always happens when you get short term momentum moving "cross-current" to medium term signal / trend line.  As I posted a week ago (23rd June), we have seen a short term correction / sideways movement now when daily momentum broke down over the signal line last week. This allowed us to reallocate capital to other more useful trades such as gold. Now, it appears that stocks want to break up again... Out of interest, this cross-current momentum shifting to an upside breakout is what technical chartists will refer to as a "bull flag". But the bull flag pattern never really tells you when the breakout is coming - you need momentum for that.

- Look to start taking profits on gold, although the theory of big numbers means that traders will be pushing for the $2,000 level - maybe hang on until then...
- Start entering long positions on Dow and/or other stock indices
- Short vol (VIX) index, earning a nice interest carry as well, although tight stops please.... By being long stocks and short vol you're actually highly leveraged to stocks going up - not delta hedged at all...
- ZAR should also strengthen as "risk on" mode kicks in again
- Bitcoin has shot its load now and is over-extended to the upside. As stocks rally I expect Bitcoin to lose its allure, although the $10,000 level should hold as floor support now...

P.S. Now that I've posted this publicly, I've probably completely jinxed everything... Oh well, let's see....
« Last Edit: July 29, 2020, 09:05:06 pm by Bevan »
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Bevan

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Re: Trader's Journal
« Reply #13 on: July 29, 2020, 09:45:08 pm »
Another one that looks to be breaking upwards on a monthly chart is crude oil... However, note that the signal line is still deep in negative territory on the momentum graph. Thus, this is a cross-current upside break, although the red signal line does look like it wants to start turning up again as well... So whilst not as positive as stocks, this is another one to potentially go long with.

Sasol should of course benefit from both "risk on" and an upside breakout with crude. However, I don't think it's a long term share to hold. Much better to trade via CFD exposure, even with the interest overhead. However, note with crude that we are around the 50% retracement level on the monthly chart. I don't see crude making an upside run for too long... I think we'll be lucky to see $48 on WTI and then the market will retrace once more. The physical supply demand dynamics just don't support a strong crude price right now.
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Bevan

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Re: Trader's Journal
« Reply #14 on: July 30, 2020, 11:02:38 am »
Stock futures a little wobbly this morning... may have spoken a little too early yesterday in recommending to start buying. However, this is always the risk when predicting moves based on momentum.

- Try get in too early by predicting the move and you can sometimes get flipped as momentum fails to break in the expected direction
- Wait for the confirmation of the momentum move and you can often miss the big move

C'est la vie. This is where experience, patience and discipline come in. No one should ever blindly throw themselves into any trade. Rather, build your macro trade view up based on the conjunction of monthly, weekly, daily charts etc. and what momentum, market stretch, sentiment etc. are doing. Then, work on your timing of your trade entry to get the best possible price.

Remember that you should always patiently time your entry into a trade. But never be slow in getting out of a trade! Get out immediately if it has hit your stop loss and /or trailing take profit levels. Then never look back.

So this morning is giving much better entry levels to go long stocks. Thus, it's probably best to sit and watch market sentiment on the futures, news etc. to decide when to get in. Always wait for the afternoon session when the Dow is open to trade, and especially wait for after major market news events e.g. non-farm payrolls, crude oil releases, interest rate changes etc.

Although I'm less confident than I was yesterday that stocks are going to break up strongly now into August, I still think we will see a rally. It all depends on price action over the next two days....
Audi, vide, tace, si vis vivere in pace. Pax vobiscum.
Happiness belongs to the self-sufficient - https://www.thrivecentre.co.za