Broker to Trading

This is a absolute must read for anybody who wants to trade. It is mathematically plausible.

It uses chaos theory to find structure in the markets. There is some academic evidence the Forex market may not be chaotic. It does not seem to have long memory processes, like the equity and futures markets have.

It does have short or intermittent memory processes, and these are built around structures such as order flow. But it seems these give Forex temporary chaotic structure which this book is the best thing I have seen for finding.

If you day trade equities or futures then by all means use this method. But if you trade Forex, use it, but use it perhaps with filters (as a starting point, the gold standard of forex indicators, the 34 EMA). Those bullish and bearish divergent bars happen and they are possible paths to $$$, especially on the 30 minute chart.

Filter perhaps with RSI spikes and the 34 EMA. I use a bounce in the wave to tell whether this is a true divergent bar or not. But as always in Forex, the market can turn on you like nothing else, no matter what you do, so cut your losses where they tell you, at the spike top or bottom.

© 2010 Guy Barry - All Rights Reserved.

Since it is Memorial Day Weekend I will take a slightly broader view. This is about the way the equity markets have been behaving technically. Now the market has a technical structure used by traders and computer programs. The Dow is moving around the 50% retracement of the fall from the financial crisis. It got through it, but it has fallen back. This is a very important structure at all times. When a major technical level is hit, momentum stalls.

This is because traders become uncertain and there will be large clusters of take profit orders and exotic options around the technical level. Remember when EUR/USD hit 1.50 ? Many were saying it would power on through. But it couldn't and did not. I was there at the time and chose not to take a buy order and did not regret it.

Why did this happen at 1.50. Because of the profit orders, options and so on (remember the famous barrier option around 1.50). But more than this, uncertainty set in. Why was the Euro so highly valued ? Some key comments from governments were enough to reverse all this. Now look where EUR/USD is.

Something similar happened at 50% Dow. Why was the market valued like this ? The way the market has shown volatility since is to be expected. What the market needs is fundamental proof to rise above 50%. And it isn't getting this. It seems interest rates will rise, thus all the cheap money pushing the market up is ebbing like a vast tide (which is what happened at Euro 1.50 essentially).

So this cannot push it up and over. However those profit orders are being cleared and if the market feels a future recover is really here, as the market can compute on expectations, then it could still burst up as the buy programs surge forward.

© 2010 Guy Barry - All Rights Reserved.

And indeed the market fell on the 5/28/10. The technical bounce of the Euro 5/27/10 was overcome and it continued back down. This revalued the dollar upwards and partly reversed the equity revaluations which caused the surge on 5/27/10. The market did not fall that steeply as the Euro did not completely have its gains reversed.

The Forex market does not go up and down, it goes in waves, retracing its steps. The important issue is whether it is on an upward or downward trend. The long bearish candle on the 4h chart is ominous, not to mention the double top on the 30m. This said, on the 1w chart EUR/USD is consolidating, which may give some hope for equities.

Because the market is about cash flows and not fundamentals, the Forex market is determining events in the equity market. When the recovery gains strength, this situation will reverse. It is helpful to look at Forex charts which show money flows. These are particularly EUR/USD and USD/JPY. These will give you a useful insight about what is happening in the equity market.

© 2010 Guy Barry - All Rights Reserved.

The market since 2008 has been characterized by a huge amount of cheap money (from very low interest rates across the world) swirling about from stock to stock, pushing them up in waves. Today (5/27/10) a Euro rebound caused a huge surge despite some negative fundamentals. Why ? Because it is all about cash.

The Euro rebounded for technical reasons, because it bounced from a low which went under its low in the financial crisis. The computer programs more or less have to have to revalue the Euro when this happens (the spike bounce). This cheapened the dollar and caused massive program buying of now relatively cheaper commodity stocks, which were cheap anyway.

However there are fundamental strengths. I do believe elements such as the stimulus bill and the force of rationality within the Obama administration is laying the groundwork for a real asset driven movement upwards.

If this is the case then companies with strong balance sheets will be worth looking at. Right now they have this quality, they come up with the floods of money. Another company my model rates very highly is G (these are the stock symbols, put them into MSN Money).

© 2010 Guy Barry - All Rights Reserved.

This is another great Forex book. Forex is rough, it must be said, but the more you stick with it, the nicer it gets, in stages. Raghee is very experienced trader and the niceness of it shows here. There is some real magic here. For starters the 34-EMA high, low, close moving average (which she calls the 34 EMA). This is something I sometimes use.

It shows support and resistance, and it can be a good filter. I have actually used it to filter the 'Trading Chaos' methods (to be reviewed). It is one of the more coherent technical methods. Raghee trades on medium term time frames and does not like scapling. She uses trendlines and Fibonacci levels. Again these work well to show support and resistance in Forex. Her methods are about using momentum.

The initial surge upwards to enter, then gradual exits by lot as support or resistance is encountered. If you want it fast and you want it now, then these methods you may find less than thrilling. But there is a sound model there. It is like in a way a Forex version of 'Rule Number One", by Phil Town, it is tough as there is a powerful model behind it. It is a book worth reading and re-reading.

© 2010 Guy Barry - All Rights Reserved.

Alright...this is one of the best books on Forex I read. It cuts though the messiness of Forex, the lore of technical analysis. Now technical analysis is not nonsense, but the market is much more complex than the programs used in technical analysis.

Schlossberg does not like the ADX. I find it useful, as it can indicate a coming divergence when it is at extreme levels (40 +). He does like the RSI, as do I and really likes Bollinger Bands, particularly when used as a pair of 1 and 2 standard deviations.

I would say his methods are for those who have a lot of capital. The methods he talks about, including his own, try and ignore the way the Forex market moves, the sudden reversals which either make you buy at a top or sell at a bottom, but this takes serious cash back up.

It is basically an attempt to ignore the zero sum game inherent in Forex. But this book is a fascinating insight into the way larger traders use the Forex market. And this can be useful information for smaller traders.

© 2010 Guy Barry - All Rights Reserved.

The model I use looks at financial data over large numbers of companies, in a comparative way. In data analysis, if you have a large sample you can see perturbations from the mean. These perturbations are what indicates the convergence and divergence factors I blogged about earlier.

Remember the concept of amplification ? This is what a good company does, it amplifies cash in. This capacity to amplify shows up in the company's financial statements over 1, 5 and 10 years. The best companies are like gold standards, they set a basis for comparison and perturbation. Simple right ?

The best companies I have found include JEC and EME. This is not a recommendation to buy, never listen to any advice to buy, except yours, this is an analysis I made which I am blogging about.

The good thing about companies in sync with the index is they can be pulled down to cheap prices by market movements, no matter the state of the company itself, but come up again, the market computes like this. There are more in this group.

© 2010 Guy Barry - All Rights Reserved.

Investing is fun. The hard part is learning how to read financial statements. But this is all you need to do and once you learn how it is enjoyable. There is no need to use a stock screener, no need to read the papers, no read to look for tips (but you do this anyway, as it can be fun). When you read a financial statement, look at a divergence or convergence between cash and earnings over 1, 5 and 10 years.

This gives you an a very well grounded view of whether the company is working as a machine to generate cash, which is the point of a company. This is a computational view of a company, input cash, output lots more cash, like an amplifier. But this is exactly what a company should do. When you do this you are testing it, like an electrician tests a circuit.

If you get involved in trading, which is different from investing as you get caught in the mechanics of technical trading programs, you will find divergence and convergence is a key concept, maybe the most profitable one. Why ? Because it shows a basis for a computation test, like the circuit, and computers are doing the trading (or rule programs used by a trader).

It is an important concept in investing because it shows whether a company is strengthening (converging) or weakening (diverging). It is possible to profit from a weakening company, either by selling your shares at a high or shorting them down. There is no need actually to get a statement, all you need do it look at MSN Money or Yahoo Finance (I look at both). Like anything when you do it enough, it becomes easy to do, and those divergences become pretty obvious. 

© 2010 Guy Barry - All Rights Reserved.

This is one way to trade in Forex, using the 1 minute chart. Do it in bursts of a few hours, as losing concentration on this leads to loss of money. I do it with USD/JPY, as it moves cleanly. The main problem is to keep an eye out for trending, which usually happens in a breakout.

Thus look at higher time frames, especially 30 min, and keep an eye on developing chart patterns which usually signal a breakout. Look at EUR/USD 30 min now and then to see what it is doing as it adds momentum to USD/JPY.

If you hit a range which tends to happen between sessions, i.e. from say 6-8 pm NY time then it can be quite profitable as you can even pick tops and bottoms. How do you do this ? I use a visual method. In this you look for, in a bottom, a momentum upwards in a candle formation and in a top, a momentum to fall. It really is quite visual, it looks like a fountain spurting up or falling off a cliff...!

Keep an eye on chart patterns on the 5 min, which might indicate for example you are actually retracing in an Elliott Wave and thus your range play could turn into a trend play...if you are on the right side of it. Be ready to cut and run, set your losses very small, a few percentages at most of your margin.  

I use RSI and MACD and the Ehler Fisher Transform. All these generate computer thrusts forward up or down when they hit oversold or overbought, which is what you are looking for. For the MACD look for the MACD turns and crosses. Divergences are high probability plays on this, especially using the Ehler Fisher Transform. Keep an eye on the Awesome Oscillator, it is good for trend momentum changes.

In general you are not supposed to use too many indicators, but you need them here. They are really telling you what the computer programs will do, they are like heuristics rather than rules, just be aware of them. As I said it needs concentration.  

Set a loss limit of a certain  percentage, say 10%, at which point you turn off your trading program and chill....! This is very important, you can get locked into losses so easily, everything is at high speed...not fun at all.  Never go long at the top of an Elliott Wave (this is maybe the main mistake to make in Forex and so so so easy to do).

This will finish you, as the candles consolidate in too tight patterns for the cost of the trade to make money. It is a good idea as well to check for volatility, as this tends to invalidate technical indicators.  

When it works it is a lot of fun...there is an educational idea to this, which is giving you an intuitive feel for the way the market moves. The forex market is different from equities in some respects. It seems not to have long memory processes. This is a radical computational difference. It means you have to trade with the computers.

Does it work ? Like anything in forex, there is an element of luck, it depends on how random the market is. If it isn't so random it works, if it is, it does not.

© 2010 Guy Barry - All Rights Reserved.

The market crashed in 2008. Or did it. Influential models used in investing reference share value to earnings re-invested into the company over time. But for a long time, there have not really been earnings on any reasonable definition of them.

The tech bubble was based on future revenue being booked on a vast scale as present revenue. This pushed share values sky high, as the models themselves said they should be. But the revenue was not real, this was nothing to re-invest and grow the companies and share prices had to fall to reflect this.

The same thing happened from 01-07 in the recovery from the tech bubble.  There was revenue, but it came from spending by consumers from debt, from credit cards, and mortgages. Thus overall, in the economy there was no real asset growth and the market finally revalued itself in 08 to reflect this. There is nothing wrong with the market. So what is it doing now. The same kind of thing.

From 08 till now, the Fed has kept interest rates artificially low. This means major investors can borrow dollars very cheaply indeed and invest this into equities. There have been no significant earnings to justify the surge upwards from 8000 - 11000. What has been driving it up, is all this cheap money.

But a few months ago, the Fed said this was coming to an end, with a hint about raising interest rates, and the cracks started to show. This began in the Forex market where all things are shown first, but they are not as obvious as in equities. In further articles I will discuss this :) What is happening now is a major re-valuation of assets in equities.

There was nothing really surprising about the 900 point fall, it needed no fat finger. But this does not mean assets will be re-valued down to a Dow of 8000 or less. Governments are already finding ways to reflate. But...the models I use suggest there is a real recovery and a real recovery will not reflate but restore asset values. But asset values right now are inflated and depend only on new ways to disguise this with debt.  

The question is then, will it be possible for this recovery to take over from the effect of withdrawal of stimulus of various kinds in time. There are certain technical events which indicate it may indeed be...and indeed the volatility you are seeing is exactly this process, a new computation already developing within the market on asset growth versus debt

© 2010 Guy Barry - All Rights Reserved.

It took me years to get to finance by way of many things. The graduate and post-graduate work I did was about modeling, using advanced computational algorithms, to derive behavior of systems. They were engineering systems, cars and analogue circuits, not markets.

Years later, I got hold of some popular books about investing. These books were the first thing about investing as a process I ever read. Till then, I had not really though much about markets, they seemed like something far off, of intense importance, but populated by smart people in suits.

But now, it was totally intriguing. Why. Because it seemed to me it was about models. I wanted to know what is the model.

But I have no way of knowing what that is, so I went to the source, that is I taught myself finance, with a focus on the construction of a framework to derive assertions I could test in the marketplace itself (that is the part which is both fun and risky). I did not look for a model per se. I decided this would be a construction of praxis.

I studied financial analysis, chaos theory, statistical models in finance, pretty much everything I could find. And a framework stared to appear. I applied it to equity markets and got seemingly miraculous results as shares after a few months rose and rose and rose...like magic, but it wasn't.

It was the result of a computational system (the markets) which cohered the structure and function of a company to a share value symmetrical to this, over time (the process to symmetry from asymmetry is consequent on certain divergences in financial statements). This computation was decayed by debt structures in the market. In fact it worked most strongly after the crash of 2008, when debt structures were cleared from the market. But they were put back in, by the $ carry trade bubble.

But if as I believe President Obama will effectively restore asset value with his policies, then this function of the market will be strongly restored again.

(edited 5/12/13 12:45pm)
(edited 7/6/14 9:08pm)

© 2011 Guy Barry - All Rights Reserved.