Talking about trends Part 2

If you have not read Part 1, I'd strongly suggest to read part 1 (click here), is this is a continuation of the first part.

We have already established that the financial markets are fractal by nature. Now let is elaborate on this by looking at some live charts.

EUR vs JPY m5

This is the 5 minute chart of EUR vs JPY. We have a shift of trend on on this timeframe. Prevoiusly price was making higher highs and higher lows and all the sudden price broke the previous low and made a strong move down. Some may say this is a down trend. Let's have a look at the 1 minute chart.

EUR vs JPY m1

This is the 1 minute chart of EUR vs JPY. We have two timeframes showing a lower low and possibly a lower high.

We already know that we cannot really talk about trends without specifying the timeframe. The assumption of a bearish trend in development may be true on the lower timeframes seen above. But what about the higher timeframe such as H4 or Daily?

EUR vs JPY H4

This is the H4 chart of EUR vs JPY. What we thought might be a trend on H4 may only be a reaction on the higher timeframe. 

EUR vs JPY D1

This is the daily chart of EUR vs JPY. Price is making higher highs and higher lows.

While we assume a bearish trend on the smaller timeframe, the higher timeframe shows us a bullish trend. Some traders who were lucky to take the trade from lower prices might have gotten out because they got scared by looking at the smaller timeframes. This is not wrong. This is one way to manage the trade. It is one form of risk- and money management (clicke here for more about risk- and money management). 

The trend on the daily did not get invalidated, so I must assume the trend continues. And I can keep my position open and still keep an eye for warning signs on a smaller timeframe such as H4. The story is told on H4, that's why I maintain a part of my position. And now I am scratching on a new aspect that I want to talk about in "Talking a little bit about risk management". (If you have not read my article "Talking a little bit about risk management part 1" click here).

I hope you enjoy reading my articles. If you have any questions of would like to give me feedback, please leave them in the comments section below.

Happy trading,

Oezy

Talking about Trends part 1

Today I want to talk about trends. We all did hear the famous line “The trend is your friend.” Well, this line is so true. But this simple sentence leads to a lot of confusion. So let’s delve into this matter.

But let me confuse you a little bit more. I promise I will clean up the mess. What is a trend? Some see three bullish candles in a row and call it a trend. Then there are traders who put a Moving Average on the chart and say if price is above that line, the trend is bullish and below that line for bearish. Then there are trades that look at an oscillator and say if price is above the 0-line, the trend is bullish and below the 0-line for bearish. I am not going to say this is wrong, as there are many different ways to approach a trade. But I want to state, that there is a lot of information missing in this approach. Others talk about higher highs and higher lows, which is about the classic definition of a trend. While I tend to agree with the latter one, there is still information missing. Talking about trend requires more than saying “the trend is bullish” or “the trend is bearish”.

Let’s talk about fractals. The markets are fractal by nature. And I am not talking about the Bill Williams Fractal Indicator. Not yet that is. So what are fractals? Did anyone of you ask yourself this question? Now we are getting into Chaos Theory. No worries, I am not going to lecture you about the theory of complex systems. When we think of Chaos we have a picture in mind where there is no order at all. Most of us do not know that Chaos is a higher form of order (complex and dynamic). We are already talking about fractals. Fractals are self repeating patterns. While each single pattern looks the same, each single pattern is individual. Snowflakes are very a very good example to describe the fractal nature. Each individual snowflake looks like the other. But in detail they are all unique. And this applies to the financial markets as well. I can post any chart and hide the timeframe. No one would be able to tell what timeframe it is. This is the fractal nature of the markets. And now we are getting closer to talk about trends.

Above I gave a classic definition of trends. We are looking for a series of higher highs and higher lows for a bullish trend. A bearish trend therefore would come with a series of lower lows and lower highs. But since markets are fractal by nature, we need to define the timeframe. Let me give you a fictive example where we are looking at the daily timeframe and we see a series of higher highs and higher lows; hence we have a bullish trend on the daily timeframe. But this may merely be a pullback on the weekly timeframe, where we have a series of lower lows and lower highs. Or a series of same level highs and same level lows, which would define a ranging market.

Let me illustrate this with some charts. I will not go into details at this time as that would take too much time and space. For now we’ll take a general view of the market flow.

USD vs CAD H4

This is the 4 Hour chart of USD vs CAD showing us a series of higher highs and higher lows. This is bullish.

USD vs CAD D1

This is the daily chart of USD vs CAD showing us a series of lower lows and lower highs. This is bearish.

USD vs CAD W1

This is the weekly chart of USD vs CAD showing us a series of higher highs and higher lows. Recently we are seeing a potential shift of trend (more about this in a later post).

USD vs CAD M1

This is the monthly chart of USD vs CAD showing us a series of higher highs and higher lows. This is bullish.

As you can see by the charts, it is not suffice to say the trend is bullish. We need to refer to the trend on a specific timeframe. The charts clearly show that a pullback on one timeframe can be a trend on another timeframe. And this goes on and on. We have a bullish trend on the monthly timeframe while the daily is bearish. The weekly already formed a lower low and a lower high, which is basically bearish but the monthly is in a bullish trend.

I will get deeper in the topic of trends in future posts. I hope you enjoyed this article and found value in reading it. If you have any questions and feedback/suggestions please leave them in the comments section below.

Happy trading,

TT

A very lucrative money making maneuvre - stop hunting

Hunting stops is a very lucrative money making maneuvre in more just one sense.

Lets look at the red arrow in the below chart. Before the candle closed, we have a break above a previous high. Breakout traders love to see highs taken out and position themselves. Either a pip or a bigger buffer above the high. Or depending on the timeframe e.g. 5 min chart with a close above. The close serves as a confirmation of a successful break. As you can see, price did move quite some distance above the previous high. And on lower timeframes this looks even more promissing. But then price reverses. There are many differnet type of longs in at this point. Those who missed the longs at lower prices that jump in, Breakout traders, and those that already have been long at lower prices. Some of those traders that took the break of the previous high get scared and close their position. These scared traders add fuel to the bears. There will be also some that expect a pullback to the broken high. But as you can see price moves below the high. And here most of the breakout traders and those that were long form lower levels either close their longs or they get stopped out, as their stops are regularly below the swing high that got broken (support).

Now the H4 candle closed as a big Shooting Star / Pinbar. The level is sound. A Shooting star at resistance. There is a fakey (a breakout that failed). There will be many traders that look to short this asset now. The eager ones take the short with the close of the Shooting Star. Others will wait for the break of the Pinbar. And then there are those that trade the smaller timeframes. I personally like such pinbars and would also get tempted to trade this. So am not blaming those that take the short. Fortunately the low never gets pierced so those wating for a break are lucky. The supposed short setup, which is at the same time a fakey (a fake breakout) is a trap for those that short. Most traders who have been long from lower prices get scared and exit their trades, which is not to be blamed. But price continues to move higher. And now short stops get taken out. Eventually the high of the pinbar gets breached, but price retraces again. Those that think now is the time to make some pips jump on board and take the long trades and we have another stop hunt. We have a Bearish Engulfing Pattern. 

This is the reason why we do not want to be the early bird. There are predators waiting for their bait. Let others be the bait.

Lets look at the second (green arrow). Below is the same chart again to make reading easier.

We have a big pinbar. I don't like the location of the Pinbar (Hammer) as it is not at the bottom. But the formation is the same. The interesting point I would like to draw your attention to is, look at how far the low of the pin went. I takes out the previous low (swing low). At the beginning of the H4 Pinbar price was moving up. To some traders this looks like the early stage of a bullish trend (higher high and higher low). To others, this is a pullback of the bigger bearish move from 17,75. At the open of the Pinbar, price is also testing a resistance level. As price moves lower, we have those traders that think this is a bullish market, that get scared. So they close their open longs for small profits or and we have those bullish traders that get stopped out as they have their stops below the former higher. In addition to these bullish traders that are in a loss, there are those traders that see the end of the pullback (of the bearish move) and take their short trades. Either on lower timeframes with the violation of the lows (we have a bullish trend on the m5 timeframe up to the start of the pinbar) or those that have pending shorts at the resistance level as they trade the level. Price moves nicely south and takes out the lows. There are many stop orders below that low. All those stops get triggered and then the market moves up without any of these traders that got engaged already. 

At this point it is very difficult to tell what will happen next. Price is testing again the low with another rejection candle (but big body). We may see price move back up. But I kinda doubt that. What I am certain off is, I am not going to swim with the shark and risk my Butt getting bitten.

I also marked some candle lows with a red rectangle at the left of the chart. We have Pinbars and Rejection Bars. The stops of the long traders got triggered. This is also a stop hunt. Carl taught us a nice way to avoid this situation. If the long traders had waited for the FFB, they would not have been victims of stop hunters. There is no way to avoid all losses. Everybody will lose. There is no way to avoid getting stop hunted. This is the very reason why we have to be patient and evaluate our trades as price moves. They key word is patience. Be able to adapt to chaning environments. and by all means: DO NOT GET GREEDY

Don't have the profit in your eyes, but always the risk that comes with the trade. Risk is the only thing we have can influence. 

Thank you for reading, If you have any questions please put them in the comments section below.

Happy trading,

TT

Ist ein Verlulst-Trade schlecht?

Die Frage scheint im ersten Moment trivial. Nimm dir aber einen Moment und denk mal darüber nach.

Was haben alle verlorenen Trades gemeinsam? Alle Verlust-Trades weisen einen Verlust auf. Aber nicht alle Verlierer (trades mit negativem Profit) sind gleich. Ein Trade mit negativem Profit ist ein Trade mit negativem Profit. Kurz gesagt, ein Verlierer ist ein Verlierer. Ein Verlierer ist nichts negatives. Ich kann schließlich den Markt nicht kontrollieren. Ich wäge das Risiko eines vermeintlichen Engagements ab. Im Anschluss entscheide ich mich, ob ich das Risiko, das mit dem Trade verbunden ist, eingehen mag. Entscheide ich mich nun für das Engagement, so muss ich das damit verbundene Risiko akzeptieren. Rege ich mich nun auf, wenn dieses Engagement ein Verlierer wird, so bedeutet dies, dass ich mir des Risikos eines Fehltrades nicht bewusst war. Dies würde bedeuten, dass ich nicht wirklich weiß was ich tue. Ohne ein Risiko gibt es auch keine Chance. Risiken und Chancen sind je eine Seite der gleichen Medaille  

Psychologisch ist der Grad des Schmerzes verursacht durch einen Verlust intensiver als der Grad der Freude über einen Gewinner. Dies ist das Resultat der Evolution. Wenn man mal darüber nachdenkt ist das nicht schlecht. Ich begrüße das Risiko. Risiken bringen Chancen mit sich. Das heißt nun nicht, dass ich jedes Risiko sofort umarme und jegliche risikoreichen Aktivitäten bzw. Engagements nachgehe. Ich wäge das Risiko mit der gebührenden Sorgfalt ab. Ergibt sich nun doch ein Verlierer, wird dieser abgehackt. Das gleiche gilt für Gewinner. Der einzelne Trade hat keine wirkliche Bedeutung, egal ob Verlierer oder Gewinner. Das heißt nicht, dass ich mich nicht über einen 1.000 Pip Profit freuen würde. Ich würde über beide Ohren strahlen. Aber eigentlich kommt es nicht auf das einzelne Engagement an, sondern auf die Gesamtheit der Engagements. Liege ich mit all meinen Trades auf der Gewinner-Seite, so strahle ich ebenfalls über beide Ohren.

Do you mind losing a trade?

The question posed may sound trvial at first glance. But give it a try and think about it.

What have all losses in common? Losses all have the same outcome. But not all losses are the same. A losing trade is a losing trade. There is no harm in it. I have no control over the market. I weigh the risk involved with the supposed trade. Then I decide whether I want to take the risk or not. If my decision is in favour of the trade, then I have to accept the risk involved. If I get angry that I got a loser, then something is off with my trading idea. It would mean, I didn’t fully understand what I was doing. There is no chance without risk involved. And every risk comes with a chance. Risk and chance, each are one side of the same coin.

Mentally / psychologically the degree of pain caused by a loss is stronger than the degree of pleasure caused by a win. That’s the result of millions of years of evolution. But if you think about it, risk is not bad. I embrace risk. Risk gives me the opportunity to gain. But that does not mean I jump on any risky activity and take every risk possible. I weigh the risk and decide after I did my due diligence whether I want to take it or not. If the engagement fails, it failed. Same like a winner. I don’t put much emphasis on a single winner. That doesn’t mean I won’t be happy if I had a 1.000 Pip trade. I’d be smiling from one ear to the other. But in effect, it is just one trade. One single trade is not important. This goes for the winning and for the losing trade. Overall the profit should be greater than the loss. That will put a smile on my face just as big as the 1.000 pip run.