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Back testing is the process of looking backwards to check a specific strategy’s performance stats. While it is a necessary process, here is something you should watch. We tend to look for reoccurring patterns and our mind’s eye will focus on the patterns that were true. So, if we think we’ve developed a great new strategy and we’re all excited about it, then our back testing will tend to be biased toward the positive results. Our tendency is to overlook the times when the strategy would not have worked so well. We tend to overlook other variables and bypass the instances it didn’t work out. This is called “confirmation bias” and it can occur in back testing as well as during live trading.
The trick is to realize (and accept) that no strategy is 100% accurate every time. I don’t care how many variables or indicators you place on the screen, there is no “perfect” system. Nor is perfection necessary. Instead, you need to focus on probabilities. Ask questions such as “What are the probabilities for a winning trade using this strategy?” When it works, how well does it work? When it doesn’t work, then ask how bad it is.
While no strategy is perfect, it is important to focus on loss containment strategies. For example, if your strategy works 80% of the time (which is great!), then what is your strategy for dealing with the 20% of the trades that don’t work? How will you contain the losses so the average loss is less than the average win? What is your exit strategy on the losing trades? Do you have the discipline to accept and act on those stop losses? If accepting the losing trades is a problem for you, then what sort of system of automated stops can you put in place to control your risk and develop these loss containment strategies?
I know I’ve asked a lot of questions in this post. But these are the hard questions that you need to ask as you develop your own strategies. Finding the winners is the easy part! Dealing with the losers so they don’t rob your profits is the key.
Just posted a new video analysis of two Forex pairs. The US Dollar continues to strengthen against these two currencies after recent pull backs.
You can see the video analysis in today's link and subscribe to my channel to receive new videos.
Who is Robert Joiner?
Currency Charts are compared to stocks charts and examples shown.
The promises and pitfalls of online currency trading are considered.
The EUR has been falling against the USD for quite some time, as this video shows. On a shorter term, we began falling lower again last night after resisting the 4 hour Kumo and price is currently at the 38% Fib line in its latest price loop.
Today's link will take you to free access to that video analysis.
Trader Training - Free and Otherswise
The swing charts on USD/CHF are a bit more complicated. While we have moved above some key areas of resistance, I'm not convinced that this is a good entry point. A more thorough video analysis is available in today's link.
Just posted a new video analysis of GBP/AUD. This pair has been in a strong bullish trend since May. There is some possible overhead resistance, so I'm watching key Fibonacci levels and Chiku for the next possible entry.
Fx trading is the exchange of one currency for another currency. Thankfully...
Just published a video analysis of EUR/JPY in today's link. We've moved above the 23.6% Fibonacci Retracement line this morning, but possibly more chop ahead.
Just posted a new video analysis of GBP/CAD at the URL link shown in this post.
Information regarding Forex subscription service
I've started posting Forex analysis at the URL link in today's post. Even if you're not currently trading the currency market, then you might still enjoy the analysis.
Market direction is looked at from Ichimoku perspective after a big down day in the market.
Here's another good article from Forex Crunch on key levels to watch for the EUR/USD. The Greece situation is deteriorating rapidly and all markets will likely see huge volatility beginning with today's currency market open. Today's link takes you to the article from Forex Crunch.
If only our losing trades would hold up a sign that read "This trade is not going to work out". Things would be much easier. But that's not how it happens, of course. We do not enter a losing trade on purpose. In the beginning, we think the trade is going to work out. We firmly believe that this trade is going to be profitable for us. So, when it turns into a losing trade, then we have a problem. We are slow to respond to the change in character because it means losing money and it means we were wrong about something. Our denial of the facts leads to hesitation and sometimes even denial. We begin to hope that luck will shine our way and rescue us from the situation. Meanwhile, the losing trade continues to sit there and rob us of our money.
Perhaps you will find it helpful to think of each trade as a guest in your house. You are throwing a party and you've invited several people over to your house. These are not close friends, but you deem them to be people of good character. But during the party you notice suspicious behavior from one of your guests. They are avoiding eye contact with you and they seem to sneak out of your sight. Then you catch them in the act of stealing something out of your house. It's a small item, but still you recognize now that this person is a thief.
What would you do? Would you calmly "let it go"? Or would you take immediate action and throw the thief out of your house?
In the same way, we need to be watchful of trades that appear to be "good trades" and then reveal themselves to be thieves in our house. Recognize their true identify quickly and get rid of them. The failure to cut losses quickly, and to ignore their impact on our bottom line, is the downfall of nearly every trader who doesn't make it.
Recognize the thieves early one. Stay in the game.
Ichimoku charts are available on many platforms, but the charts will sometimes need to be adjusted.
If 20% of your trades don't create a profit, then that doesn't mean your strategy has failed.
If you accept the imperfection, then you can manage the probabilities. If you expect perfection, then your disappointment will cause you to hold losing positions too long.
The Ichimoku chart is a cluster of indicators that provide the trader with a unique perspective.
Have you ever been in a trade where you got out with a nice profit...and then you look back and see the stock just kept on going? While you're grateful for the profit, you also realize how much more money you could have made on the trade by being a bit more patient.
These trades have some characteristics in common. You can click on the link in this post to see a video and to hear a few of my ideas that you might find helpful.
Just wanted to publish this story. Mark is a member of the MHT chat room and also Ichimoku Trend Trader. He was kind enough to let me share his story:
"Bob, I want to thank you for the amazing service you provide with your Ichimoku Trend Trader. A bit of back story, I was laid off from my job about 3 months ago and through a very fortunate set of circumstances, was introduced to one of your other services. When you opened up your Ichimoku Trend Trader program, I knew I had to get on board immediately! Ichimoku has been the most comprehensive trading education I have received, and your trade alerts have consistently yielded double digit returns in mere days! After 3 months, I am still unemployed and loving life! I thank you Bob, and my Family thanks you – I get to watch my kids grow up!"Mark K
Bollinger Bands Squeeze Play shows a technical set up for trading this consolidation pattern.
This link takes you to the latest video post on Facebook. I'll be posting more to Facebook, so follow me.
A description of three membership sites.
ichimoku swing trading service
I recently sent out a notification that my Forex program "Forex Pip Starter Pro" opened up this week for new students. But that open enrollment period ends tomorrow at 5 PM Eastern. So, check out today's link if you want more information.
Looking for CHFJPY do find support here, based on the attached chart view that shows weekly Kumo support and an oversold 4-hour chart.
A friend told me about the tradingview.com site this week. I've starting posting a few trading ideas on the site with annotated charts. You can follow the link in today's blog post to see one example. You can also follow me on that site and on the twitter links to those charts (twitter/bobjoiner).
A quick note in case you're interested in learning how to day trade. The chat room I've been leading since 2008 (yes, 6 years now) is accepting new members at this time. The open season for new members doesn't happen very often, so grab your seats now. About a month ago, we changed the format so now I'm able to share my charts and talk about the technical set ups for each morning's trades. (Wish this were available when I was learning how to day trade.) If you're interested, then look under the "Membership Club" tab on the home page of this site and scroll down for the link to Morning Hours Trading. Again, this is a limited time opportunity.
Saturday mornings are a great time for doing trade reviews. I look back at my trade journal from the previous week and I ask myself two questions. What did I do well? What could I have done better?
I've always learned more from this daily journal and weekly review that from any other book I've ever read about trading. But I wanted to share one of the thoughts I just wrote in today's review.
There are times when we have to step away from the computer. We might be in the middle of a trade and price is debating various areas of support and resistance. While we like to be right and have our targets hit, we also need to protect ourselves from ourselves and set stops.
You don't have to step away from the computer to use this idea, but you can think of your trade decision as a type of bracket order. Let's say you're long on a stock or a Forex pair. You can set a target at an area of overhead resistance so that you'll make a profit. You can set a stop at an area of support so that you'll stop out of the trade if it moves too far against you.
Either way, your emotional response is important for your trading. You can be happy if the trade moves up and hits your target. You can be thankful if the trade moves down and hits your stop. You can be thankful because you did not hold onto a losing trade and thankful that you no longer have the stress and guilt of holding onto a losing trade. You can be thankful that you did not lose more money than you did!
Either way, you can be happy or thankful on every trade. And this is a much better place from which to trade.
annotated charts gives examples of support and resistance for stocks and forex trading
The link in today's blog post will take you to a YouTube video I just posted. It's an idea about day trading stocks based on support and resistance and it's a pretty simple idea. I don't remember where I first heard about it, so I can't give anyone credit for it. But it's an interesting idea and it might help you with your trading. So, click the link and give it a thumbs up if you like it. Thanks.
The link in today's blog will take you to a YouTube video I just recorded. In this video, I look at various areas of support for the S&P-500.
I've been writing a book off and on for the past year and I'm trying to wrap it up within the next six months. Some of you have already responded to my requests for input, but I'd really like to hear from more of you. The working title for the book is "The Top 12 Ways to Lose Money in the Stock Market". The link in today's blog entry will take you to a very short survey. You might find it helpful to answer the questions and print a copy for yourself.
The video course, Trading the Afternoon Market, teaches traders how to see stock charts, using technical indicators and contextual trading.
How to prevent day trading losses from eating up your gains.
After yesterday's big rally in the market, I expected some chop in both the stock and the Forex markets. And we saw plenty of that. But that's what markets do. They expand and they consolidate. They wobble and they fall. But, after a day like yesterday, it's okay for the market to tread water for a day and consolidate those gains.
The problem is that some traders expect today to be like yesterday. And if that is your expectation, then you might tend to hold onto losing trades too long because you just can't believe the stock is not going up. That sort of disconnect between expectations and reality can catch you off guard. In your mind's eye, you're buying the stock long because you can see it going higher. And it when it quickly retreats, then your day trade can quickly becoming a losing trade and your mind is still trying to get a handle on what just happened.
This is why we have stops, of course. We need systems in place to protect us from ourselves and from our inability to accept reality when it doesn't match up to our expectations.
Just like it's okay to have a break even day in the market, it's okay to exit a trade at break even also. If a trade is not going in the direction you thought it would, then it's okay to get out of the trade. Some traders think "well, it hasn't hit my stop yet, so I'll just hang on a little longer". But you're not getting paid to hope. You're getting paid to make decisions, quick decisions based on what the ever-changing charts tell you about what is happening with price action in this moment. So, it's okay to recognize the change and exit the trade at break-even. Remember, you can always get back into the trade.
In today's Annotated Chart, I show a chart of SYY and how price faded from the open today after the initial excitement waned over their merger with U.S. Foods.
There's an old saying that goes something like this: "buy the sizzle, not the steak". It has to do with investor emotions and it describes how investors can get so wrapped up in a news event that price charges higher. But as the steak is delivered (today's open on SYY), the sizzle of the big news event fades away and so does price.
While you cannot assume this will happen after every bit of positive news, you can use the Fibonacci lines mentioned in today's chart analysis to see which way things are headed.
Markets gapped up this morning after fewer jobless claims were posted. But then it was flat after that. I call this "no wind on the lake", meaning that it's more difficult to trade (or sail) when there's no volatility (or wind). Today was one of those days, and it can mess up an inexperienced trader because they have to adapt their trading style to the day's volatility. Traders with less experience want every day to be the same and they can sometimes overtrade the market when the trade set-ups just aren't there.
Using indicators and crossover patterns in still needed on a day like today. But, when the market is flat then a trader can easily lose patience with the trade and fail to capture the slow flow of the market.
It's also a good idea to have an alternative to trading stocks. In today's Annotated Chart section, I review a Forex trade set-up using Fibonacci Retracements.
We traded VJET in the chat room this morning. If members stayed in the trade from my entry point, then they would have made 20% profit on this one day trade. That's unusual of course, so I show some of the indicators I used to make the trade in today's Annotated Chart.
VAP = Volume at Price. It is represented in various ways depending on the chart package you are using. Basically, it's an overall sentiment indicator for various price brackets on the chart.
In today's Annotated Chart, I give another example of using VWAP as a technical indicator. Shorting the stock when VWAP becomes an obvious line of resistance became a great short entry today.
One of the reasons for using technical analysis for trading stocks (and Forex) is often overlooked. I talk about it in terms of "the basis for the trade", so let me explain what I mean by that.
I use technical analysis to help me spot high probability trade set ups in both the stock and Forex markets. For example, using the ARUN chart, the basis for the trade was price resistance at the VWAP line. Price was down for the day and had already shown resistance to this line. So it's not rocket science to say that this was a high probability trade. But that line became "the basis for the trade". It acts as a kind of line in the sand. So, if price violates that line by very much and other indicators begin to show strength, then the basis for the trade becomes violated. That means you exit the trade with a small loss if that happens rather than wishing and hoping the situation improves. The basis for the trade gives you the reason to take a tight loss in case you're wrong.
In this case, ARUN stayed true and continued fall after testing the VWAP line one more time. You can see the chart in the Annotated Charts section.
Having a "basis for the trade" (based on whatever set of indicators you find reliable) will help you make better trades and enable you to take smaller losses on the trades that don't work out.
CADX provided a great opportunity as a day trade today. We traded it in the Morning Hours Trading chat room with an entry at $7.73. You can look at today's Annotated Chart to see some of the indicators for staying in that trade.
I'm often asked which chart service I use. If you'd like more information about that, then you can click the link in today's blog to see my discussion about chart services.
(Hint: the TC2000 button on that page will take you to a 2-week free trial.)
ONVO issued its Q report two days ago and price continues to move higher. Here's a company that wasn't around until 2007 and it is based on 3D printing. It's focus is on bioprinting and specifically the creation of liver tissue. Amazing stuff.
In today's Annotated Chart tab, I show how I used VWAP as a basis for taking the trade long in the MHT chat room.
GOGO reported earnings today and made a nice move higher. This company is set to enjoy the open skies even more (as an in-flight internet provider) as restrictions for such use are beginning to lighten up.
We traded GOGO in the MorningHoursTrading chat room this morning and did well with it. But the context for the trade is also important. In today's Annotated Chart section, I analyze GOGO using Chiku Span.
Chiku (or Chikou)is part of the Ichimoku system. I've read that it is one of the most widely used indicators in Japanese trading rooms because it is so predictive and reliable.
Today's annotated chart shows two examples of the Chiku crossing through the historical price curve on the Forex pair USD/CHF.
In today's Annotated Chart, I show a daily chart of the S&P-500. You can see my notes there about that chart.
Markets saw a good bit of profit taking today and that's my main answer to "why did the chicken cross the road?" A lot of investors have had itchy trigger fingers as the market has made a series of successive new highs. Everyone knows that things don't go up forever. So you don't want to be the last one to take profits. The problem is that this creates a sort of snowball effect (yes, I'm mixing my metaphors) as selling begets more selling. My best description is the old cartoon where the character falls through the top floor of the building and then the force of the drop causes him to fall through the next floor in the building, etc.
In today's chart, the 23.6% Fib line is a sort of first floor area of support. We went to that line and stopped today. We'll see what happens next.
In today's Annotated Chart, I show how you can use CCI on a 4-hour chart to find over sold buy points. While the 4-hour chart is most often associated with Forex trading, it can be useful for stocks as well.
OXBT was one of the stocks we traded in this morning's chat room. I drew two Fibonacci Retracements on today's chart example (see the tab "Annotated Charts"). The 23% Fib provided support after the initial morning pop higher. Drawing a new line (in blue) to the later high showed support at the critical 38% Fib line. You can also draw Fib extensions after the first Fib series to find possible targets (not shown).
It doesn't happen very often...thankfully. But stuff happens. Today, the primary charting package for thousands of traders (worden.com) went down at 9:41 due to a technical problem with their data source. The data didn't get updated until around 11:45. Of course the loss of charts for two hours also throws off the technical stuff that day traders use for making their trade decisions. Moving averages, crossover patterns, volume, etc. It all gets messed up until the charts have time to catch up.
It's a good reminder of the reason for having back up plans in place. For example, I have two internet providers, four computers, three data feeds, etc. But, even so, my primary charting package was down for most of the morning so this limited my ability to trade.
But it's also a good reminder about the limits of technology and power as we head into the winter season. Power lines can go down. Internet connections can be lost. So, as a general rule, it is always best to place some sort of physical stop on every single trade you enter as soon as you enter your trade order. That stop can always be adjusted. But, if you ever lose your charts, power, or internet, then you'll be very glad that stop was placed.