Some key search terms for good trading ideas

My reading program has yielded some interesting trading ideas. Whenever I look at the links that passers-by click on, I am surprised by the relatively few number of hits from the research in the right column. There is some very good stuff there. Most of it is fairly current. Instead of listing the links here, I thought I would list some key word search terms to whet your risk appetites. (God knows we could use some momentum right about now.) Finance graduates and educated traders/investors will already know what these are — but anyway…

Hedging pressure hypothesis
Cash-and-carry arbitrage
Term structure of futures prices
Trigger strategies

Happy browsing. I’ll be posting/updating over the weekend. Time is in short supply these days.

TLT

New on the blog

A revised business plan is posted on a new page: Business Plan.

Excursion studies are posted on a new page: Excursions.

These pages are still under development and are posted to solicit feedback on how to improve them — and how to make them more interesting and relevant to other traders. There will be a number of new pages on rolling technical and fundamental studies.

New on the blogroll:

Excel Trader

Finally! Hat tip to HPT for this very cool and useful blog. And thanks whomever is behind the blog for the excellent information.

On a more positive note…

I’ve added another great blog to the blogroll. This guy trades several instruments and has about 21 years of experience, the last three of which are as an independent trader. In his own words, the blog started out as a way of explaining to his friends what he does for a living. There is a lot of information for new traders on key topics, as well as a consistent picture of how and what he trades. His site is named after my favorite martial art as well, Tai Qi.

Check it: www.taichiseal.blogspot.com

There I go again…

I recently received an email response to one of my comments about trading fora in the post entitled “Metatrader 5 on the way“. The Rumpled One, in a response to my comment here, asked me why I posted this statement:

Michael Kreslik and others like the Rumpled One make their living, one way or another, from selling indicators and general coding services.

I think the reason for that statement, taken in context, is obvious. TRO says it is false and misleading. He denies selling indcators. In his own words:

Sometimes people send me a donation and I send them over 100 indicators as a thank you. Donations are usually $50 - $100 so I receive less than $1 per indicator.  If I were selling indicators wouldn’t I have a website and list each one separately?

I also know for a fact that he (or “a marketing agency”) was selling an ebook he wrote at http://www.themaddashforcash.com/tro/main.php with a trading method that was more of a trading idea than a method per se. The price? $500. About Kreslik himself, TRO says:

Let me tell you something about Michal Kreslik, he is DRAINING THE BANKS with his automated system.  There is nothing they can do to stop him.  He makes more money in a day than some people make all year.

I am highly skeptical of this statement, and believe The Rumpled One is mincing words on the other points he made. But whether this is true or not is beside the point. My intent in those comments was simply to warn the reader about getting lost in the worm hole of new indicators and pretty charts. The three fora I mentioned are the top three for Metatrader, and they are very good fora besides. They can be valuable tools, when used the right way — with a structured research plan and purposeful questions. If you’re just there to gawk, shop, and socialize, in my opinion you’ve failed out of the gate.

So TRO may be right. He may not be selling anything. (Although I doubt that very much, a good lawyer may be able to prove that in a court of law…in Southern California.) Kreslik may indeed be making more in a day than some make in a year from his trading. (I doubt this very much, as well, unless we’re talking about khat farmers in Somalia.) But the main points of my comment stand. One must be cognizant of the passions and the interests at play, and whether one’s own interests are well served by spending considerable time and treasure on all the fora sparklies. If they are, then whip out that credit card old chap and “donate”.

I hate to be such a relentless knocker. However, the statement will not be retracted.

@All: If you want to see how indicators that are not for sale can be purchased, and if you want to see how Michal Kreslik is draining the banks every day, then check out this forum:

www.kreslik.com

It really is a good forum.

Cheers,

TLT

New on the blogroll

Hands down, the single most intelligent relational information aggregator that I have ever found:

Silo Breaker

I hesitate to tell everyone about this site because, well, I know it will end up on several blogs and I don’t want to share the credit for “discovering” it. For about a year, I’ve been using this site for other kinds of research and only recently discovered its usefulness for currency-related information. I now use it as my homepage when I open my browser. If you do a lot of open source research online, then you will instantly recognize it for what it is: THE BEST. Read about the team behind this service and you will know why. For currency trading, this site and Thomson’s FXHub form a perfect team for staying current on FX-related issues.

Also on the blogroll is a new trading blog with bond and other interesting asset classes:

ITrade4Real

It’s not always in real time, but the results are there: Wins *and* losses. (And no bullshit.) It took the man behind the curtain eight or nine years before he became consistently profitable, so he’s hung in there just like we all should. “The profits lie in doing simple things at the right times,” he wrote in a reply to my email, ”and in managing your psychology so you trade from a position of strength.”

Show this sage trader some link love.

TLT

A trader’s rejoinder: I’m just a caveman…

Your academic world frightens and confuses me. I don’t understand your big words and your fancy titles. But there is one thing I DO know. When the put/call ratio says go long, I go long; When it says go short, I go short. That’s just the way I think, because I’m just a caveman.

Sometimes when I’m reading the research I have to step back and keep perspective. After all, the output of the put/call ratio is pretty easy to understand. Common trading sense would imply that no person should trade on the signal of this indicator (or any other) alone. The need to combine this indicator with other analysis goes without saying. And the academic research often frames questions from a perspective that is completely different from that of a trader.

One of the core truths of trading is this: For every gaggle of lip-flapppers who proclaim the invalidity of an indicator, there is one person who is making money with it. And so the trader’s rejoinder makes sense to me. Completely. On the other hand, if you’re using an indicator, wouldn’t you like to understand it a bit more deeply than the signals provided by its output, even if it throws a little doubt on your project? So I dig a little before I start buying into its merits for my own approach. I embrace the doubt. I even go a step further, and test for ways to disprove my ideas. Sometimes it’s about number crunching. Sometimes it’s about a simple thought experiment. Most of the time, it’s about clear thinking, or at least what passes for it in my book.

I’m reminded of a great book by David Aronson entitled Evidence-Based Technical Analysis. I read this back in early 2007 and still refer to it occasionally when I need help framing my questions. He examines several technical indicators from an empirical approach. While the scope of his testing and the conclusions are very limited, his approach is useful for showing traders there is more to using these indicators than meets the eye. This isn’t a revolutionary approach by any means. It’s common sense and has been written about before.

If I’m going to use a survey, sentiment, oscillator or trend indicator, or any other kind, I must understand the construction of the indicator and its context in the market and in my method. The stochastic indicators are excellent examples of why this is important. Most people spend a lot of energy telling other people that stochastics do not work, but I see a lot of successful traders use them as part of their decision process. I suspect most traders do not bother themselves with understanding how an indicator works, even if they use it - and even a caveman would scoff at this voluntary ignorance.

Anyway, the point of this post is to say that while academic research isn’t particularly positive on the put/call ratio, a trader’s P/L statement is all that matters.

Thoughts?

Related post: Maybe there is more to the Put/Call ratio than meets the eye

Maybe there is more to the Put/Call ratio than meets the eye

Which one do you use?

I’ve been taking a look at the put/call ratio as a sentiment indicator over the past couple of weeks. After reading a post highlighting the indicator as an overbought/oversold signal on Kevin’s most excellent market blog, I became curious. There is always, always, always something more to the picture with sentiment indicators than meets the eye. And I’m not convinced that it can or should be used as a simple sentiment indicator for the following reasons:

(1) The ratio does not show the motivations of puts or calls across market segments;
(2) The motivations of institutions, commercials and specs are often vastly different, even when their direction is aligned;
(3) These differences can be arrayed in ways that are diametrically opposed to one another, even when direction is aligned; and
(4) These differences can, and often are, in turn arrayed against the indicator itself precisely at the wrong moment for a retail trader.

And then there is the time horizon of a particular trader, and whether this time horizon is oriented toward a cyclical or secular approach for a given instrument. There is really no way to ascertain the aggregated motivations of market segments and compare them to one another — if there was, I suspect there would be no market to speculate on because one would have perfect information. (I feel the same way about the COT report, incidentally, although I think as a standardized survey indicator it might be more helpful than the put/call ratio.)

Open source academic research on the internet also confirms that the put/call ratio has no statistical advantage as a simple oversold/overbought indicator in any market but one – the S&P 500 – and only then when combined with the volatility index and the TRIN. (Which makes sense when I think about it.) And only when used on longer term time horizons during non-trending periods. (In other words, the last six years are out for the S&P 500, if one trades on the daily time frame. Now might be a good time to start using it, however, until the next range breakout.) Simon and Wiggins (2001) confirmed the effective use of put/call ratios when combined with the volatility index and the TRIN for the S&P 500, but more recent research uncovers other factors that influence volatility and returns, suggesting the put/call ratio and sentiment indicators in general are overweighted for their importance to positive returns.

My feeling is that as complex topping patterns are currently forming across all the major indices, in confluence with fundamental themes, the put/call ratio could be effectively deployed as a contrarian trigger when combined with other analysis. (How is that for a gutless statement?) Since I don’t trade the indices (yet), I think I’ll reserve absolute judgment for a later day. For now, I will watch and learn. I’ve got more to say, but I’ll reserve those thoughts for another post.

If anyone can change my mind about this indicator, or has an idea of how to use it that might be helpful, I’m listening!

Related post: A trader’s rejoinder: I’m just a caveman…

What’s in a price?

There are many influences on the pricing of a currency pair. These change across all time horizons, as you are all aware, and are reflected in the comparatively volatile movement of price during any given period of time. On forex fora and blogs I read this kind of thing all the time:

“News highs were made today because price bounced off of the [x] EMA.”

Or this:

“Traders rejected the [x]% Fibonacci retracement level, causing the market to roll over.”

Really, does this make any sense? (Rhetorical question.)

And then there is the next level, so to speak, where charts are annotated with key levels, high probability patterns, and news announcements. In static situations, it is easy for me to look back over the previous week and map out some of the more prominent price action. I’ve done so in the past, on the first version of this blog. Fundamental and technical events are easily identified — in hindsight. It’s very easy to be precise. And I’ve also documented such events as they set up, evaluating potential opportunities and risks . It’s also very easy to be precise in this exercise, particularly with respect to risk and reward. Of course, trading on these ideas is another matter altogether.

There are hundreds of currency, commodities and futures blogs documenting such events with crisp, clean charts, efficient annotations and elegant commentary. None that I have come across write about order flows or capital flows, treasuries or bonds, and only rarely about options and implied volatility. This information, I believe, is what could potentially provide an edge for someone who combines fundamental and technical analysis, and particularly someone who employs quantitative analysis. Of course, this information is probably best used over longer time horizons. The shorter time horizons would benefit more from order flows. The problem, as always, is where to get all the above information. My guess is that much of this information is “close-hold”. There is a reason why the interbank market is not centralized like the major exchanges. But I’m sure it can be found. (Anyone have any ideas?)

Most books and many articles in common publications such as Currency Trader, SFO, and TASC present laundry lists of what Andrew Spanton first coined as ”Market Moving Events” (MMEs). Next to Spanton’s daily radio commentary, Kathy Lien’s articles and books have been the most coherent – her first has a good primer on MMEs. (Incidentally, you can find everything in that book on the Investopedia website — free of charge.) These two people cater to the everyday trader. The advanced stuff is not easily covered in an article by a non-specialist. Nor is it easily understood by the core readership of mainstream publications. Few sources ever mention the effects of treasuries, bonds and capital flows. Fewer still mention market microstructure dynamics. Almost none of them mention microstructure theory. I’m getting the feeling, recently, that what is least mentioned is probably more influential.

So what is in a price? I’d like to hear what your ideas are. I’m also going to email a few people and see if I can’t get them to give me their opinions as well. And, as always, I’ll be conducting a search of open source academic literature on the topic. If I get enough of a response, I’ll follow this post up with another entry on what the opinions of the blogosphere and academia are — as well as what some institutional traders are thinking.

TLT

New on the blogroll

I’ve been trending in the direction of listing actual traders on the blogroll lately (for what I think are obvious reasons). To this end, I’ve found another site worth perusing.

FX Trading Ideas

I believe this guy trades interest rates for a European bank. He specializes in emerging markets, which is something I don’t see a lot of people blogging about. Why not click the link above and show him some bloglove?

TLT

Metatrader 5 on the way

For those who don’t know, I use NeoTicker and MetaTrader as my trading (and testing) platforms. I don’t blog a whole lot about NeoTicker, because I’m still trying to wrap my mind around it. I don’t blog a whole lot about MT4, either, because there are already many (maybe too many) good sources of information. Every once in awhile I check up on new developments and this time was surprised to find an interview with MetaTrader’s inventor. Fans of MetaTrader may be pleased to know a new generation of the software is on its way. (I’m a couple months late in finding out….) This time around, the MQL5 language will support objects and events and process much faster. The platform may also support multiple threads, although I may be reading the discussion in the forums incorrectly. Watch the interview here:

MT5 interview with Stanislav Starikov

MetaTrader has gained a huge following in the past five to six years, particularly with the release of MT4. MT5 will likely prove to be a true next generation platform, with structural changes that will make it an altogether different and more powerful animal. I look forward to its release.