Maybe time to buy the dollar now...right now?

In a recent post, I outlined a trade idea that had to do with buying the dollar when it touched the upper linear regression trend line. If you haven't/didn't read the post, here it is. Coming up with ideas for trades can be a very helpful exercise but being flexible and nimble in your forecasting is a prerequisite for successful trading. Unfortunately, the Eur/Usd pair has not rallied back to my entry target but that's okay because I can tell when I'm wrong and I was wrong...at least for the time being.

Here's an updated 4 hour chart of the Eur/Usd pair:As you can see from the above chart, the Eur/Usd did not hit it's upper regression trend line. Although that would have been an excellent entry, it's not mandatory for a good short entry into the pair (short being long the dollar). Actually, my trend following system just flashed a sell signal and I've taken a small position with the intention of adding to it if it starts making money.

Below is the same chart as above but, it's zoomed in so that you can easily see the sell signal. Here it is:The red circle outlines the sell signal from my system. Notice that both lines around the price are red (this is the multiple trend following systems signals) and the bottom histogram (BB width) is above it's break out zone (the purple line). These signals tell me that it's probably time to sell the pair (buy the dollar) because it's the path of least resistance. We'll see how it plays out...because nothing is even close to a sure thing and my trend following signals are certainly not an exception.

On a different note, here's my weekly ranking with the CNBC portfolio challenge. Like I said, I'm not actively managing my portfolio anymore, I'm just going to let it play out. As you can see, I finished the week in the top 0.2% of the challenge but I've actually fallen back to the 961st position...apparently lots of participants had huge gains on Friday because I actually had considerable gains but still fell back position wise. Here's a screen shot of my ranking:
Next week should be really interesting, both with currencies and stocks, and I look forward to posting some opinions on the price action. Be careful trading because we seem to be at a potential turning point...especially with stocks.

Good luck out there.

TLT

Strong Close But....

We had a big rally at the end of the day today with the S&P closing up 3.5 % but, it was a rally on low volume...see chart below.It's hard to determine the significance of today's move because it's the day before the Thanksgiving holiday and there was low volume traded. Friday won't be much help either because it will only be a half day for the US markets. With that, I say to take this week with a grain of salt and be ready for anything on Monday.

The are a few things that we can discern from the recent price action. From the daily chart below, we can see that the S&P jumped over some overhead resistance today but it ran smack dab into the downward trend line (the yellow line). Also, there are a couple of significant resistance levels that are not too far above the current price level (higher blue lines). The MACD just gave a great buy signal with the bullish crossover (blue circle on the macd) but the RSI and BB width are both flat...kind of conflicting signals.At this point, we'll just have to wait and see how the market reacts to these various resistance levels. If the price stalls at the yellow line, I'd be looking to short and if it blows through the yellow line without hesitation, it might be time to start buying. Like I always say, only time will tell. I don't try to predict the price moves, I only attempt to properly react to the signals that the market gives.

On a different note, I've climbed up to the top 0.2% in the CNBC portfolio challenge. At this point, I've decided that it's not worth wasting too much of my time with the challenge and I'm just going to hold onto what I have and see how it plays out. Unfortunately the challenge has some rules that are very unfavorable to traders like only 10:1 leverage in currency trading (whereas I usually use 50:1) and only being able to buy and sell stocks at the prices for the day's close, no intraday prices. I hope that you all have a very happy Thanksgiving!!!

TLT

Almost time to buy the dollar again?

Although the dollar has been very strong over the last several months, it has taken a slide recently. A pullback is generally expected when an instrument has run up as much as the dollar has and the inevitable pullback can present an excellent opportunity for a longer time frame trade (like holding a trade for several days and maybe even a week as opposed to several minutes to hours). The trick is finding a good point to start fading the move and to have your "uncle point" designated before the trade. Entering a trade on a big pullback can be nerve racking...that's why you really need to have a detailed game plan that you can follow to the T.

I like to use a linear regression channel when I attempt to enter a trade like this. Below is a good 4-hour chart (as in each bar is 4 hours) of the Eur/Usd pair. The light blue lines are the linear regression lines. Linear regression is a concept that says that prices will eventually revert back to an average (reversion to the mean). I've found that this tends to especially work in a trending market with a trending average. Here's the chart:
The yellow circle is the area that I'll be looking to sell the pair, preferably close to the top line. I'll probably take half the position on the initial touch and then wait for the trend following indicators to confirm the sell for the other half.

One other thing that I like to look at to get a feel for how the dollar is doing is the broad dollar index. This index portrays the dollar against a broad selection of currencies to give you a more complete picture. I like that the index is going down and that there seems to be some potential support at the 50 day moving average. I would not be surprised if the dollar index finds support at about the same time that the Eur/Usd pair hits the top of the linear regression channel. The index provides some insight into the breadth of the dollar, which will help to determine if the move is potentially sustainable. It is always nice to see the dollar rallying against several currencies as opposed to the one currency that you're trading it against.

We'll see how the dollar plays out and I'll be sure to post and update soon.

Good luck out there.

TLT

*****Update*****

Several hours after I made this post I was doing my nightly scan through various blogs and I pulled up Moaxian's site. He could not be more bearish on the dollar and he thinks that it will give up all of its gains and fall below 70 on the dollar index. This view obviously goes against my plan to fade the move or "buy the dip" in the dollar but his reasoning is for fundamental reasons.

I'm not saying that he's right or that I'm right, I just think that our different perceptions are interesting. I will still take the trade because fundamental views tend to work against my bottom line, but it is good to note potential macro shifts of this nature and be alert to new trends that may develop.

Update on USD/CAD Trade

Sure enough, the trade closed out last night while I was asleep...I love it when that happens. The down-trend got a little choppy but it hit the profit target.The horizontal green line is the entry, the red is the stop and the blue is the limit order that was placed. It's not a coincidence that the profit target is about 3 times farther than than the stop...this setup had a favorable risk/reward ratio.

On a different note, there's a lot of chatter on the news wires about Citigroup getting a bailout. Fortunately I added some Citigroup to one of my CNBC portfolios on Friday because it looks like that stock might take off today...only thing that would be better is to have it in my real account but this would never happen because I don't bottom feed for stocks like this when I'm trading my money.

As for the markets in general, they could go either way. If the Citigroup news is big enough we could see a nice rally today but, the path of least resistance still seems to be down.
There are several points of overhead resistance that the market will need to get past and then hold them. The MACD is still bearish but it looks like it could turn up...today will probably be a pivotal day and it will set the tone for the following week. Given what we saw the last three trading days of last week, anything is possible. The only somewhat sure thing about this market is that moves happen very quickly and they tend to be big. Have a good Monday!

Good luck out there.

TLT

LIve Trade: USD/CAD

Tonight I caught a great sell signal with my trend following system on the USD/CAD and entered a trade. The signal was generated in the 5-minute time frame. Here's a shot of the chart. The sell signal is highlighted with the red circle. Notice that both trend lines are red...that's the sell signal. Also, in the top left of the chart, the signals for the different time frames around the 5 minute period all say down or indicate that they're about to say down. The final factor that confirms the sell is the BB width indicator at the bottom of the chart. The BB width line is below the green line and it's turning up, which indicates the currency pair was basing and is beginning to break out.

This is pretty close to an ideal trade for me as all the indicators are working in conjunction with one another. One final thing to note is that the pair is selling off rather quickly and it continues even while I'm writing this post. I've noticed that price moves that immediately follow and confirm a buy/sell signal generally have a better chance of moving further than when the price stalls after a signal. Odds are that this trade will close out while I'm asleep tonight considering that its about 10:30 p.m. right now. I've already entered my stop and limit orders so everything is on auto-pilot now. I'll check the outcome in the morning and post a follow-up chart to show how it plays out.

Good luck out there.

TLT

Opportunity is Nowhere

Markets tanked yesterday and it's finally starting to seem like complete panic has set in. The Dow broke below the 8,000 level and the S&P fell below 800. These were psychologically important levels that were not respected by the price action at all. Here's a chart of the S&P as of yesterday.
(*should read over extended)
Everybody and there mother is expecting some kind of short term rally because of the extreme readings in the indicators. Although we might see a big rally, I can't see it lasting right now. The technicals are looking like we should stay in free fall mode for a little longer if the market doesn't get back over the short term support levels.

As for the CNBC Portfolio Challenge, my bearishness has been paying off. As of the close yesterday, I was in the top 1.1% but this only gets me up to 4,544th place. Probably not going to win this week.
As for the title of this post, I stole that from Bill Williams...author of Trading Chaos (it's on my recommended reading list). This phrase is a little game he plays that shows 2 things: 1) Perception affects us all and 2) Opportunity tends to present itself when it looks like it isn't present. The phrase sounds pretty hopeless with the way it's written "Opportunity is Nowhere." However, if you look closely, there is a different way to look at it--"Opportunity is Now-here." Just a reminder that there's always 2 sides to every coin and our perceptions do get in the way every once in a while. Although the markets are terrible, you always have to remember that they look the worst right before a turn.

Good luck out there.

TLT

Update on the CNBC Challenge

It's been a volatile 3 days to say the least. Normally, I don't trade currency around major economic press releases but I kept positions on for the CNBC Portfolio Challenge and it cleaned my clock. I had a great position in the Usd/Chf currency pair that has been trending up for some time now. Unfortunately, my gains quickly evaporated today and then, just to make it worse, the currency pair turned around and closed the day up quite a bit. Fortunately, I did re-enter the trade and capitalized on some of the turnaround. Here's a chart that shows the massive drop that occurred after the Consumer Price release.Notice the red circle...that's the volatility. Now look at the blue circle...that's volatility but it's what I consider in the realm of understandable volatility. Oh well, that's how markets behave...they go much further than we expect, and at the opposite extreme, they will not go further than we expect. It's a real son of a b****. Fortunately I did re-enter the same trade and it not only regained the losses but it made up for some of them. Here's an up-dated chart of the Usd/Chf.This volatility just re-affirms why I don't trade before and after economic releases in my real accounts. Unfortunately, with the way the CNBC Porfolio Challenge is set up, it seems that you have to take dumb positions in order to have a chance of winning. In fact, if you're not over trading, you don't have a prayer of winning. This has created much turmoil in my trading because I've been really working to overcome the kind of mental handicaps that this challenge forces you to embrace. I guess that's just the nature of these things.

In case you're wondering...I'm in the top 2.1% of all of the contesting portfolios and I had a great return of 9.7% of my portfolio for today alone. Too bad I'm still aways away from being near the top. Oh well, I'll keep it up and see if it all pans out later. Those currency positions can really pay off with just catching one major trend.

Good luck out there.

TLT

Multiple Trend-Following Systems Combined: Attempting to Achieve

Lately I've been exploring the use of a couple of independent trend-following systems used in conjunction with each other. I have finally found something that seems to work like I intended when I undertook this project. It combines 2 separate trend following systems and it waits for confirmation from both systems before an entry is generated.

Basically, it combines a moving average crossover system with a volatility break-out system. This seems to work pretty well, however, there is still room for improvement. The improvement comes with multi-time frame analysis. For this, I've integrated a brilliant indicator that tracks MACD readings for 9 different time frames (look at the upper left-hand text within the chart below). Below is a screen shot.In order to get a signal, there must be both green or red lines on the trend following signals (the band looking lines that surround the price and change color: green=buy, yellow is caution/sell, and red is sell/sell short) and there must be a correlation to the signals with multiple time frames on the MACD for an entry. Just how many and which signals I will leave for you to experiment with...if you're so inclined. I've found that it depends on your time frame and also on your profit target.

Bottom line: combining volatility and moving averages with multiple time frame readings can give you some excellent trend following entry signals. Just remember, the hardest part of trend following is getting out of the trade. Trading is like law in that you always practice it(as in "practicing law") and there is always room for learning...no matter how long you've been doing it. I give you these ideas in hope that they will influence a trader to think a little more or maybe even for someone to turn the corner and become profitable. It's one big challenge that attracts the best of the best...and we all hope that's us.

Good luck out there.

TLT

CNBC Million Dollar Portfolio Challenge

The CNBC Million Dollar Portfolio Challenge begins tomorrow and just for grins, I've entered. In order to participate in the Challenge, I've created a couple of strategies that should cut down the time necessary for trading...still need to be able to work and pay the bills.

First of all, I'll be trading currencies and stocks...with an emphasis on the currencies. The daily and hourly time frames will be used for the currency trades because the slightly longer time frames (I usually use 1-5-30 min) will allow me to enter trades and then not check on them for at least several hours and maybe even a couple of days.

As for the stocks, I'll be using a short screen that I've developed in order to generate a list of potential shorts. I use MSN's Deluxe Screener...the most powerful free screener available on the web (at least that I know of). Here's a screen shot of the screener and the list that it generated for today (Nov. 16). I will most likely create a portfolio of shorts and update it once a week...not even going to try to make long trades right now, it's just not worth the effort. I'll post some routine updates to let you know how the challenge is going and I'll also update the short screener next weekend and post the results for those interested. Good luck to my friends and everyone else that is also in the challenge.

Good luck out there.

TLT

***UPDATE***

The portfolio challenge does not allow short selling! Unbelievable, you can trade currency but you can't short stocks. Never mind my wonderful short screen strategy...instead I loaded up a portfolio with leveraged short ETFs.

ACL Analysis

By request, here is my analysis of Alcon and its magnificent breakdown.
Lets look at the above chart since everything I do is based off the chart. (Fundamentally, I have no clue what is going on at Alcon). First, look at the big yellow arrow. That's the initial sell signal, which occurred at the end of September or the very beginning of October. At that point, I would sell any long positions that I have.

Second, notice the big red arrow and corresponding red circle. That point is the sell any position (which should have already happen but sometimes we're emotional humans) and then if you're a trader/investor that shorts stocks, look to short. In looking for a short, I like some different indicators to confirm that prices are heading lower and that momentum is picking up. At the time of the sell short signal, the MACD was showing a sell by a wide margin (blue circle and arrow) which is good and the BB width was picking up and hitting new highs...showing that volatility is picking up. I really like to see volatility hitting higher levels for both long and short entries. Given this combination of indicator readings, my strategy would have been to go short around the red arrow. The most import of those secondary indicators to me is the BB width hitting new highs. This tends to some what reliably indicate that there's a chance the break out will persist and the chart shows that it has so far.

Just my 2 cents...please keep in mind that it is always easier to look back with a sell bias and look for reasons you should have sold. That's why it's important to have pre-set/pre-tested criteria that follow well defined rules to get in and out of trades when the moves are actually happening and you don't have the benefit of hindsight.
ACL had a great run over the past couple of years, and really ever since it's IPO, but the trend is broken and only serious day traders/scalpers and fools will be trading the counter trends on a major down move like ACLs having right now. Remember: "The Trend is Your Friend"

Good luck out there.

TLT

Sad but True

I've gotta give Charles Kirk credit for finding this one...I think it's both hilarious and incredibly sad.

Citi Hits 12 Year Low

Citi is imposing new initiatives to help at risk borrowers stay in their homes. These new initiatives coincide with a brand new 12 year low for the companies stock. Ouch! Below is a monthly chart of Citi that goes all the way back to the late 80's...you can see how much faster the fall occurs as opposed to the rise.

It will be interesting to see how these new policies work out for Citi in the long run. I've been negotiating with one of the other big banks on a mortgage for an estate that is currently in probate. Without mentioning any names (although it's one of the top 4), I will say that I'm not very impressed with the way the bank has been handling the situation. The bank I'm dealing with is doing everything possible to not work with my clients to keep the property out of foreclosure...a very opposite approach to what Citi is imposing.

Maybe the bank I'm dealing with just needs their stock price to hit a 12 year low and then they'll get more friendly, or maybe their policies work better for them and that's why they are not in the same situation as Citi. Who knows, but it sure makes sense to try to keep people in the homes so that mortgage payments can continue to be made. Only time will tell which method will work.

Make sure to take a moment today and remember all the veterans...we're all very grateful for their services.


Good luck out there.

TLT

Joe Satriani and Leslie West

Boy, my ears are ringing this morning. I went to the Joe Satriani concert last night at the House of Blues in Dallas...f.y.i. an excellent venue. For those non-guitar players that are unfamiliar with him, he's one of the greatest guitar players in the world and arguably one of the best ever.

Opening for Mr. Satriani was Mountain, whose front man Leslie West is also an amazing guitar player and quite a good singer as well. You might know Mountain's one big radio hit "Mississippi Queen." (I'm pretty sure its picking up popularity with the young crowd because of the songs appearance in Guitar Hero).

At the end of the show, Leslie West came out and played along side of Satriani for a couple of songs. What amazed me was the amount of respect Satriani had for Leslie West and for that matter a couple of other well known guitar players that he mentioned during the show. Although more famous and technically even a better guitar player, Satriani had no problem stepping back and letting Leslie West take center stage. It's great to see people like Satriani that just seem to be grateful to be in the league he's in and not have a big head or ego about it.

These same principles can certainly be applied to the worlds of business and trading. Those that stop acting grateful and respectful towards their colleagues and even the market as a whole tend to suffer from over-blown egos and ultimately they fall pretty hard. I'm going to keep a picture from the concert in my desk for a while as reminder of Satriani's respect and hopefully it will help keep me in line a little.

I haven't even looked at the market today, so I have no idea as to what's going on in the world today...will probably take the rest of the day off and read the headlines and blogs this weekend to see what I missed.

Good luck out there.

TLT

My Own Volatility Stop

Whew, I've had a crazy couple of days. I managed to catch a couple of counter-trends in the Eur/Usd pair and I watched my account equity expand very rapidly. And it was about the time that I started feeling invincible in my trading that I got caught in some very choppy sideways moves. Man those are frustrating because you see a good profit on a trade and then it reverses on a dime and the trade gets closed out for a loss. That's just the nature of trend following.

These things shouldn't shake me because I've been using an automated trading system, however, I have the system set to where it does not trade in counter-trend rallies and we've mostly had counter-trend rallies (at least how my system defines them) over the past couple of days in the Eur/Usd currency pair. Thus I've been manually trading for the past 2-3 days. There have been some HUGE rallies lately and just catching small pieces of the moves has been very profitable. Needless to say, I've ended the past few days up quite a bit but it still hurts that a small chunk was returned to the market to pay off the trend-following tax gods. Just a part of following trends.

I credit a lot of the success over the past few days to a new stop that I've recently developed and have been implementing for the first real-time trial run. It's a volatility stop that uses a couple of standard deviation lines of a custom momentum oscillator to exit the trade. The idea for this stop came from a trade that I recently made; I bought a currency pair on a squeeze trade and then sold after a quick gain. The problem was that the currency pair continued to move up by 150-200 pips after I sold...which is leaving a lot on the table. This is when I realized that I did not have a good exit signal for the squeeze trade, which is a manual trade as of now, so its not part of the automated system. I needed an exit indicator that could let a position run but also get me out very quickly when momentum dissipates. Thus my standard deviation volatility stop was born.

Here's a chart of a recent trade. The latest purple down arrow was my entry signal to sell the Eur/Usd pair. The top indicator window is the volatility stop indicator (it looks like a MACD but it doesn't work like a MACD at all). The indicator consists of a momentum histogram with a couple of standard deviation overlays. The premise of the stop is that I'm trading quick breakouts that have lots of momentum and the standard deviation lines alert me to reduced short term volatility that tells me the momentum is waning. It doesn't get me out at the absolute top or bottom but it generally catches most of the move and allows for a decent profit. You can see from the chart above that the green standard deviation is above the purple line. The green line is a shorter period line than the purple, which indicates more immediate volatility/momentum. I look for the shorter line (green) to be above the long line (purple) when I enter the trade; this indicates that volatility is rising. Then I exit when the short line crosses the long line, which indicates that momentum is declining from lowering volatility. See the chart below. It's a screen shot from when I closed the trade 21 minutes after the above chart that shows my entry. Notice that the short line (green) crossed the long line (purple). That's when I exited and it was an excellent exit.

Just thought I'd share this idea with hopes that it might help someone out with their own trading. I'm certainly not saying it's the absolute best exit because it does have some glitches and I've had to develope other rules to accomadate those issues. That will make a great post for some future date, although, let me just say that the momentum histogram has a lot to do with making up for the flaws in the standard deviation stop. My next step is to automate and fully test this stop, I'll let you know when it happens and what the results are.

Good luck out there.

TLT

Update: Live Currency Trade

Just hit the profit target on the trade. The trade lasted 2 hours total and booked a profit of 77 pips. Below is the hourly chart showing the profit target (green line) being taken out. Nothing left to do but sit an wait for a new signal...maybe there will be a nice rally back up to the long ema line that will offer another good entry.
I'll also be looking for a squeeze trade (using the indicator on the bottom of the chart) this afternoon but first we'll need to see some congestion and tightening for that setup. I'll save the explanation of the squeeze set up for when I get a signal...it's a very interesting and profitable setup.

Good luck out there.

TLT

LIve Currency Trade

My trading system fired off a sell signal this morning on the Eur/Usd currency pair. I got a fill at 1.2762, a stop was placed at 1.2795 (above the hourly bar) and a profit target limit order was placed at 1.2685.

This trade is risking 33 pips (in currency pips are the equivalent of points in futures) for a potential profit of 77 pips. This gives the trade an R-multiple of 2.33 which is acceptable (2 is the cut-off) . Below is a chart showing the trade on an hourly chart. The vertical blue line shows where the sell signal occurred, the green line is the profit target and the red line is the stop loss. We'll see how it turns out...the fun thing about using a mechanical system is that the trades happen and you get to just sit back and watch. If this one doesn't work, no biggie, the system will fire off another signal shortly and we'll try again. Each trade is nothing more than a number and as long as you know the odds are in your favor, you can just let the numbers work for you.

I'll post an update later.

Good luck out there.

TLT