December

I have recently been busy writing my thesis, and now that it has been graded and published I would like to do a short review about the subject. 

The quantitative research was carried out by first introducing concepts of technical analysis and by studying historical price data from a five-year time frame. The price data of the instruments was selected randomly from four different samples of asset classes. These segments included then 18 different derivative instruments. The price charts were then studied form a market technique- based strategy’s viewpoint: The strategy aims to find spots in the market, where movement will appear probably. The periods, through which the prices were studied, were also selected randomly from a 20-year timeframe. These fictitious order executions were obtained by entering the buying and selling signals into a table.  From these prices could then be the instruments behavior describing statistics derived.

 The results of the different instruments can be seen in the following pictures.

 In the first two columns we can see how many bullish, bearish and neutral periods each instrument had. Then we have columns with the signals given by the tested strategy,

Where the yellow highlighted cells represent numbers that are sums and the grey areas averages.

The quantitative results of the research showed that technical analysis can be used to some extent to gain continuously positive returns. As the research showed that instruments behave differently, the measure of profitability depends highly on the perspective from which the results are examined. Altogether, the scope of this study was to investigate, analyze and develop the field of technical analysis. As we can see in the tables, the commodities and index derivatives were clearly the most profitable instruments on average. The presented strategy represents a simple trend detection method that can easily be enhanced by adding terms and conditions.

Buy gold now?

EUROSTOXX and SMI open with a gap down

What happens next ?

According to a market technical strategy, we would have a bundle of sell orders just waiting to be filled below the recent low. But according to some other technical strategies, now would be a good time to buy. If the recent low will be broken, the DAX will most definitely be in a bear market at least the rest of the year.

Since we have a 96% correlation between the Dax and Eurostoxx, the same applies here. I am looking for a pullback and a movement trough 2972,7 that is where I place my order. I am also open for a major bullish correction.

Some successful trades I made this week

Although my bachelors thesis will be written about a market technical strategy, I haven´t had much time to monitor the markets. Still I managed to pull of some positive returns with FTSEMIB and IBEX 35. Since the week started looking bearish on those indices, I was positioned bearish myself.
Despite we do not have definite sings of a trend  reversal on the weekly chart with these indices, the daily chart is starting to look like a bear market.
                                                             
                                                                    IBEX 35 H1

FTSEMIB H1

How the quants of wall street affect the financial markets

When it takes about four seconds a human to read a tweet, an algorithmic trading system needs only a few microseconds to read a significant article, process the information and make trades. A human can´t compete with these algorithms, since it takes a human brain too long to process the same amount of information.  These algorithms have created a new ecosystem in the recent five years that is taking over. It seems scary that the markets are no longer controlled by humans, because we are dependent on commodities. Sean Gourley explains the "ecosystem"  of algorithmic trading in the following video. 

Always look at the big picture

Like you should not have a long position on the S&P 500 at the same time as you are short on the Dow Jones, you should apply the same rule to different time frames. A trader should always remember to look first  at the "general weather situation" before moving on to smaller time frames. One can see a trend reversal on a 15 minute chart but when looking at the daily chart, it appears only to be a correction of a bullish trend. The "the trend is your friend" rule applies also here.

Here is one example of a well constructed position:

Picture 1. We start the trading session by looking at the daily EUROSTOXX chart. We are                   now at breaking point 2 and see that this could be used as a trend confirmation.

Picture 2. Next we move to a samaller timeframe, for example the hourly chart. We can now identify a formation here and place our order. The direction of the position is now the same as the direction of the main trend.

Picture 3. to give you a hint what it would look like on the 15 min chart.

EUR/RUB about to breakout

The crisis between Ukraine and Russia has been affecting the EUR/RUB currency pair so that it is now in a steady bullish trend. A market technical entry at 50.820 will most definitely work. There is also a probability for a small correction movement just before the breakout. Pay attention to the volume to avoid  false entry.

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Volatility adjusted position sizes

We know that  volatility is derived from the past changes of the securitys price and we know it is calculated by multiplying the square root of time in years with the standard deviation of the securitys price within that timeframe.

What I am interested about, is using it to determine position sizes and its effects on reducing losses. Volatilty can work on one´s favor or  it can also lead to major losses. The volatility index is known as the "fear index" which indicates the bad times for stock options. 

 Volatility adjusted positions are crucial for reducing risk. A position could be determined by subtracting the current volatility percentage from 1 and multiplying the factor with the usual contract size. Obviously your broker must offer splittable contracts or then you have to trade large amounts to enter such positions. Also cfd (contracts for difference) brokers offer microlots to trade with.

                                                           VAP. = (1- Vola%) * contract size
                                                                                or
                                                           VAP.= (1-√T*σ) * contract size

What about gold?

XAUUSD with Simple Moving Averages 200 and 50

As we know gold as the safe haven for investors, we may have some potential to buy in the near future .

Last week major stock indexes declined and as soon as they start to trend down we know there is a lot "air" for gold. On the other hand, blue chip companies have had a great year and therefore ivestors are holding on the stocks to receive generous dividends. Moreover there is  a rumor about gold that the Indian government would loosen their tight regulation regarding importing gold.

From the technical perspective, we had almost a breakout of the downtrend last week at 1.268, but it turned out to be a testing of the resistance or false breakout. As soon as we have some 1,2,3 formations and a breakout over the 2, I would buy. A turbo-long certificate would be the suitable. A drop below 1.180 would mean, that it is still a bearish climate.

Trailing stop by Michael Voigt

I recently read a book written by Michael Voigt that deals with breakout strategies. It also puts forth a trailing stop strategy for break out traders. The pros of the stop are, that it works in every market and on every time frame. The cons are that it does not work with highly volatile instruments that oscillate a lot.

The basic idea of the trailing stop is to "trail" the price. The stop is basically moved  to the closing price of the previous period. However there are some enhancements added to it.

The most important one, is observing the price movements that show signs of oscillation. Always when the price opens and closes within the area of the previous period, we are talking about an "inside bar". The inside bar has nothing to do with candlestick formations. Often when there is an "inside bar" the price tends to oscillate within the next periods. So the stop should be dragged to the close of the period before the previous.

So here is the OMX Helsinki 25 Index on the daily timeframe. As you can see the stop works well when the market is in a trend and continues to make higher highs and lows.

Potential trade for the year 2014?

Investors celebrated the year 2013 taking home some big profits. The stock index that rose the most was the Venezuelan IBC Index. With 2706,38 points and 474,1 percent it was the ultimate outperformer. After that came the DFM-General index with 99,9 percent. As third came the Argentinian index Merval. The Japanese Nikkei 225 index landed as fourth with 52,7 percent in performance. The Finnish HEX performed 23,1 percent and was 17th.

As it remains a little uncertain whether these indices keep rising, we can take a look elsewhere, e.g. the weekly chart of EUR/PLN spot price.  Massive triangle formation. I am not saying this will happen, but there is a probability. And that is what trading is based on: Probabilities.