Trading eminis with cycles

[theplumber]

didn't go as I expected. I took a 50 short @1207. One day this week will be ugly and it will be either Wednesday or Thursday, I'm making a bet for Wednesday

per J Goepfert

http://researchnews.osu.edu/archive/sunstock.htm

[theplumber]

After further looking at some charts/models I'm looking to maybe add to my short up too 1210 and a stop 1215. What I really want to do though is short more on any confirmed selloff/weakness. The next cycle date I got is early next year (Jan 5-7) so if I'm stopped then it goes higher into early Jan. Seems too easy though, which has me scratching my head wondering if I REALLY wrong.

[theplumber]

Originally posted by theplumber
After further looking at some charts/models I'm looking to maybe add to my short up too 1210 and a stop 1215. What I really want to do though is short more on any confirmed selloff/weakness. The next cycle date I got is early next year (Jan 5-7) so if I'm stopped then it goes higher into early Jan. Seems too easy though, which has me scratching my head wondering if I REALLY wrong.

Love it when a plan appears to come together (so far). I added a little more short @ 1209. I'm watching real close now to see if negative gamma kicks in or if the run to 1215 by Friday happens. Expiry weeks are fun.

[theplumber]

Reversion to the Mean
James Simons, President of Renaissance Technologies, offered in a roundtable forum:

"I heard this story and I think it's true. Anyway, it's a pretty good story. It's about how the Air Force trains pilots. When a trainee made a good landing, he would be praised. When a trainee made a bad landing, he would be ridiculed. Well, it was perfectly clear to the general that the first approach was lousy and the second approach was good. He had statistics demonstrating that when you praised a pilot who made a perfect landing, his next landing was not likely to be as good. Whereas, if you berated a pilot who made a bad landing, his next landing was likely to be much better. However, if you think about it, it doesn't matter what you do, because landings are most likely to be average. If a pilot had an exceptional landing, his next landing was likely to be average. If he had a poor landing, his next landing was likely to be average, also. By slicing the data and only looking at what follows good landings and praise, you only see part of the picture. You must consider how data was selected before you can draw conclusions. This example is closer to home. We interview a lot of managers, because we do some asset allocations. Although I haven't compiled careful statistics on this, it frequently seems that a manager with a marvelous record does not perform as well after I invest with him. Why is that? Well, do managers who lost 35% in the last three years show you their records? No, those guys aren't showing anyone their records. You are seeing a sample of the best managers, a sample of "good landings." Going forward, some people do better and some people do worse, but reversion to the mean is probably a persistent phenomenon in both managing money and landing airplanes."


Seems the run away market needs time and price to revert to the mean, which means down for now. Friday was S&P rebalancing day, if it wasn't it would have been positive by maybe 5 or 6 points. Rumor was 16 billion for sale by the close so everyone jumped in from the start selling. This next pullback will be nothing more than a buying opportunity. If a repeat of last January really does happen, like most everything I have suggests, then it should make for an exciting time. The cycle models below are S&P cash point and figure. Amazing how the cycles appear cleaner vs candlesticks. The anchor point is Nov 30 with the forecasted white is the XT model and purple is the projector. I'm thinking very much of calling it a year and closing my short @1190. After a good year like this one has been I hope I don't revert to the mean for 2005


One edit, just saw this from ESPN

PI & Red Sox
Number of days between Red Sox World Series triumphs: 31,459.

The fabled mathematical concept, PI (of PI R SQUARED fame): 3.14159.

Source: ESPN.

[theplumber]

I exited my short @1196.5 out of convenience, just want to rest for the holidays. Look at the chart below if you want to know why I picked that price, it was based on time not price. Even though I'm not one of these Gann freaks I do know the importance of what he said, "Time is more important than price, when time is up price will change". Todays trigger also was accompanied by a cycle low for the day using other methods but astro does prove to be usefull. I'll be leaving little quotes the next 2 weeks, ones that I find insightfull to trading. Hope others find it insightful as well.

"Interestingly, a new book by a leading mathematician seems to capture many of our key thoughts about markets, and represents a good foundation that supports what we believe. Benoit Mandelbrot, the developer of fractal math and geometry, discusses ten heresies of finance in his new book (with Richard Hudson), The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward, that does an effective job of crystallizing many of our assumptions about the markets. In the book, he explains why his ten heresies are problematic. His list is supported by empirical research, albeit many still believe the results are controversial. Nevertheless, the list offers good support for being a trend-follower:

1. Markets are turbulent.
2. Markets are very, very risky - more risky than the standard theories imagine. 3. Market "timing" matters greatly. Big gains and losses concentrate into small packages of time.
4. Prices often leap, not glide. That adds to risk.
5. In markets, time is flexible.
6. Markets in all places and ages work alike.
7. Markets are inherently uncertain, and bubbles are inevitable.
8. Markets are deceptive.
9. Forecasting prices may be perilous, but you can estimate the odds of future volatility.
10. In financial markets, the idea of "value" has limited value.

...Markets are not normally distributed. There is a relatively high probability for big events. Markets also have long memories, and cannot be classified as random walks. There is structure to the movement in markets, but this structure is inherently uncertain. From these facts, there is safety in following price trends. 2 It may be the most effective means of capturing or exploiting these chaotic moves in markets that have structure."
John W. Henry Monthly Commentary

[theplumber]

Stop hunters are in the market, should make for whippy action.

from analyst James Montier at Dresdner Kleinwort Wasserstein

If you are after specific investment advice, stop reading now. We seek to explore one of Adam Smith’s obsessions: what it means to be happy. We also discuss why that’s important to investors, and how we can seek to improve our own levels of happiness. The list below shows our top ten suggestions for improving happiness:

Don’t equate happiness with money. People adapt to income shifts relatively quickly, the long lasting benefits are essentially zero.
Exercise regularly. Taking regular exercise generates further energy, and stimulates the mind and the body.
Have sex (preferably with someone you love). Sex is consistently rated as amongst the highest generators of happiness. So what are you waiting for?
Devote time and effort to close relationships. Close relationships require work and effort, but pay vast rewards in terms of happiness.
Pause for reflection, meditate on the good things in life. Simple reflection on the good aspects of life helps prevent hedonic adaptation.
Seek work that engages your skills, look to enjoy your job. It makes sense to do something you enjoy. This in turn is likely to allow you to flourish at your job, creating a pleasant feedback loop.
Give your body the sleep it needs.
Don’t pursue happiness for its own sake, enjoy the moment. Faulty perceptions of what makes you happy, may lead to the wrong pursuits. Additionally, activities may become a means to an end, rather than something to be enjoyed, defeating the purpose in the first place.
Take control of your life, set yourself achievable goals.
Remember to follow all the rules.

[theplumber]

I try to keep my trading very simple with all the logical rules involved, such as the markets extremely risky and nonlinear. James Simons reminds us all that complication in trading can cause problems:

"Years ago, a colleague came up with an extremely complicated model. Initially, it worked well, but then it began to falter. I said, "Can we understand more about this model? It's so complicated." He said, "Oh no, you can't understand it. I've added this and that and put it all together and I've maximized here and there and...who knows what it is?" I said, "That is not satisfactory. I know it’s rotten, because it’s losing money. Let's figure out what else it is." I gave him some experiments which would restrain the function to a small set of parameters and -- guess what -- it was a linear function. It had little curls here and twists there, but they didn't matter. It was a linear model. Linear predictive systems fared poorly during that period, so naturally this one was losing money. The danger with some of these methods is that you can produce something simulated and it may look pretty good, but there is an air of anxiety because you don't understand it. We don’t complicate models to the point where we don’t understand what they are."

The chart below is of a forecast from the bottom of March 2003, not bad, and the zeroed forecast for 2005. Looks about right. Keep in mind this is a weekly chart.

[theplumber]

When I first saw this software from Divergence I was amazed at the price. I know of maybe 5 VERY large and powerful hedgefunds who have paid top dollar to develope software using cyclical (and other technology like speech recognition and statistical techniques used in gene processing) analysis and have achieved spectacular results and every time I've had the privilage of seeing their models I can almost dulpicate exactly with the Cyclepack. The most important stock in the world ( 10.8% of S&P financial sector and this sector 21% of S&P) was modeled below a while back, anyone trade on this info? I don't trade stocks but keep up to date as to what makes up the indecies. Others who do trade stocks may want to ask Santa for something that can show a return for '05.

Zero-Sum Insight
Trend followers go to the market to trade trends. However, not all market players are trying to do the same thing. Fannie Mae could be making change in their bond portfolio. A major investment bank could be trading a strategy that will not tolerate volatility. Bottom line people trade for different reasons for different goals. George Crapple, a trend follower with 25+ years in experience, makes the point:

"So while it may be a zero some game, a lot of people don't care. It's not that they're stupid; it's not speculative frenzy; they're just using these markets for a completely different purpose."
George Crapple
Millburn Ridgefield

[ritchie12]

citigroup, might be at resistance here?

[SERGIO.M]

.

[theplumber]

Originally posted by ritchie12
citigroup, might be at resistance here?

Good question. The cycles still point up a little more but the real question is why the strong move now? Has me wondering what the news will be.

[theplumber]

Merry Christmas to everyone around the world. Wish I could bring all of them home.

http://www.supportyourtroops.us/messageboard.cfm?showall=1

[theplumber]

Remember this from Sept 11 2004? Nice fractal chart, woulda,shoulda,coulda.

Originally posted by theplumber
Any pull back will be a buying point. Should have listened to Carl, he had this to say Sept 4 , enjoy.

My support and resistance calculations are telling me that that
Friday's highs in the bonds and notes (112-02 and 113-03 in
electronic trading) marked the end of the rally in these markets from
the May lows. In my last post (August 7, gg # 27523) I projected a
bear market low for the bond futures in the 100-102 range. I still
think this is a good target but it may take the market 6 months to
get there from here. Thus I think it likely that the next 6 months
will see many big swings in the bonds which in retrospect will all be
part of a big trading range between 100 and 116.

The shorter end of the market ( 10 years and less) will do worse than
the bonds and show a more pronounced downward trend since I am
expecting the yield curve to flatten substantially from current
levels.

The S&P's are in the early stages of a strong rally which is likely
to carry this market to 1260 by early November. I still think that a
break of at least 150 points is likely once that level is reached but
still higher highs in the S&P are likely during the second half of
2005.

Carl

I catch alot of flack this time of year from family. "Why don't I get a real job. Your wasting your education. Your not in a real profession, it's nothing but gambling." blah blah blah. Reminds me of these quotes
Speculators are not the bad guys:

"Some people think of speculative traders as gamblers; they earn too much money and provide no economic value. But to avoid crises, markets must have liquidity suppliers who react quickly, who take contrarian positions when doing so seems imprudent, who search out unoccupied habitats and populate those habitats to provide the diversity that is necessary, and who focus on risk taking and risk management."
Richard M. Bookstaber
AIMR/CFA Institute

“In the real world there is no ‘easy way’ to assure a financial profit. At least, it is gratifying to
rationalize that we would rather lose intelligently than win ignorantly.”
Richard A. Epstein
The Theory of Gambling and Statistical Logic

From Michael Mauboussin of CSFB
"A Useful Analogy
Long-term success in any of these probabilistic exercises shares some common features.
We summarize four of them:
• Focus. Professional gamblers do not play a multitude of games—they don’t stroll into a casino and play a
little black jack, a little craps, a spend a little time on the slot machine. They focus on a specific game and
learn the ins and outs. Similarly, most investors must define a circle of competence—areas of relative
expertise. Seeking a competitive edge across a spectrum of industries and companies is a challenge, to say
the least. Most great investors stick to their circle of competence.
• Lots of situations. Players of probabilistic games must examine lots of situations, because the “market” price
is usually pretty accurate. Investors, too, must evaluate lots of situations and gather lots of information. For
example, the very successful president and CEO of Geico’s capital operations, Lou Simpson, tries to read
5-8 hours a day, and trades very infrequently.
• Limited opportunities. As Thorp notes in Beat the Dealer, even when you know what you’re doing and play
under ideal circumstances, the odds still favor you less than 10% of the time. And rarely does anyone play
under ideal circumstances. The message for investors is even when you are competent, favorable
situations—where you have a clear-cut variant perception vis-à-vis the market—don’t appear very often.
• Ante. In the casino, you must bet every time to play. Ideally, you can bet a small amount when the odds are
poor and a large sum when the odds are favorable, but you must ante to play the game. In investing, on the
other hand, you need not participate when you perceive the expected value as unattractive, and you can bet
aggressively when a situation appears attractive (within the constraints of an investment policy, naturally). In
this way, investing is much more favorable than other games of probability."

[theplumber]

Happen to be surfing the web and found this article of interest http://cbs.marketwatch.com/news/stor...den=&minisite= I don't know Eliades record (and don't care) but he make a compelling argument that sounds alot like Doug Kass. This quote sticks out "We should have a strong indication of a bull or a bear year for 2005 by the end of February. If February registers a high above January, the odds favor an up year overall. Conversely, if February makes a lower high than January, the odds would favor a down year overall -- perhaps a big down year.

We will watch February with great interest"


So I did the most basic of models, using the cyclepack and a simpler one I made up for the DOW. Looks like 2005 will frustrate both bulls and bears to me.

Do having models (accurate ones I hope) make the markets any LESS risky? In a nutshell, NO. People aren't rational and markets aren't linear so people forget the risks involved in any 'sure' thing. Some on Wall Street try to take advantage of this behavioral fact. In Fooled by Randomness, Nassim Taleb relates an anecdote that beautifully drives home the
expected risk message. In a meeting with his fellow traders, a colleague asked Taleb about his view of the
market. He responded that he thought there was a high probability that the market would go up slightly over the next
week. Pressed further, he assigned a 70% probability to the up move. Someone in the meeting then noted that Taleb
was short a large quantity of S&P 500 futures—a bet that the market would go down—seemingly in contrast to his
“bullish” outlook. Taleb then explained his position in expected value terms. He clarified his thought process with the
following table:
Event Probability Outcome Expected value
Market goes up 70% +1% +0.7%
Market goes down 30% -10% -3.0%
Total 100% -2.3%
In this case, the most probable outcome is that the market goes up. But the expected value is negative, because the
outcomes are asymmetric. Now think about it in terms of stocks. Stocks are sometimes priced for perfection. Even if
the company makes or slightly exceeds its numbers the majority of the time (frequency), the price doesn’t rise much.
But if the company misses its numbers, the downside to the shares is dramatic. The satisfactory result has a high
frequency, but the expected value is negative.

What I'm trying to drive home is the need for risk management. Any accurate model or system will thrive with good size and money management. This brings me to this quote from Charlie Wright of Fall River Capital
"I often tell the story of the great fish restaurant that opened up just down the street from my office. It opened with great fanfare and was ranked in the top five restaurants in the city. The food was outstanding. But it only took a little more than a year and this great restaurant was out of business. Why? Because the key to running a good restaurant is not the food…it is cash management and risk control. It is making sure your business is run efficiently, keeping your costs (risk) in control, and managing your staff effectively. If you believe that the taste of the food is what makes a great restaurant, think of how great the food is at your favorite fast food restaurant. But, someday, watch how well that restaurant is run. Just as in the restaurant business, the key to profits in trading is not in the prediction or the indicator, but how well the trading strategy is designed and executed. The ability to achieve risk control and cash management will make the difference between a successful trader and an unsuccessful trader. If you ever have the opportunity to watch a successful trader, you will see that they don’t worry about where the market is going or about predicting when the next big move will take place. They aren’t looking to tweak their indicator. They are worried about their risk on each trade. Is the trade being executed correctly? How much of their total account is at risk? Are the stops in the right place? And so on."
Charlie Wright

[theplumber]

Expectation
"...although it’s important to have an effective trading methodology, it is equally important to develop a methodology to determine how much capital to risk. A trader that risks too much increases their chance that they will not survive long enough to realize the long run benefits of a valid trading strategy. Risking too little creates the possibility that a trading methodology may not realize its’ full potential. Therefore, while a positive expectation may be a minimal requirement to trade successfully, the way in which you are able to exploit that positive expectation will largely determine your success as a trader."
Dave Stendahl

Trading as a Business
"Thinking of trading as a business has helped me enormously as a trader. It puts everything into perspective and helps me deal with my own psychological difficulties with trading execution. Once I stopped viewing trading as speculation, my trading improved. Once I realized that I was not going to get rich quick, that trading was not easy money, my trading improved. Once I realized that almost no businesses are successful overnight, my trading improved. Once I realized that I had to make an investment in the business, both in terms of my own education and in equipment and working capital, my trading improved. One concept that is commonly taught in business schools is that of ‘barriers to entry.’ This is a very simple concept that has important ramifications as you consider trading as a business. The basic principle is that the higher the barriers to entry in a business, the higher the investment to establish market share but ultimately the higher the margins and profits.Trading is a low barrier business. You basically need a computer, a broker, and a modest amount of capital and you are in business. But because of the low barriers to entry, the competition for profits is very high. There is no such thing as gaining market share. Many people wrongly conclude that low barrier businesses are easy to start and trading is no exception. Many new traders think that trading will be easy and they will get rich quick. Experienced traders know that this will not happen. Trading is as difficult as any business I have ever been involved in. The main point to remember is that trading is a business with low barriers to entry. This means that the competition for profits is very high and you will have to be smarter, more disciplined or more creative than the majority to make money."
Charlie Wright of Fall River Capital

Humility and Arrogance

Observe with humility.
Act with arrogance.

When observing, step aside and let humility in.
When acting, banish even the concept of doubt.

When looking at a chart, look with maximum humility.
When acting on what you see, act with total arrogance.

See through your eyes,
Act from your intellect

Do not spend time and energy trying to figure out why a price moves.
Focus all your attention and energy solely on what the price is doing

The past is knowable.
The present is observable.
The future is intelligently guessable

The Futures market is a vicious, hungry predator. It feasts on the unaware, the unprepared, the uneducated. Fact: Less than twenty percent of individual traders end up winning, so by definition an individual must be extraordinary to succeed at futures trading. There are only a few paths to success in futures trading, and the most reliable of these is that of "intelligent" trading. One key to intelligent trading is to get statistical facts that can actually make you money today. There are many acronyms on Wall Street ( turn around/counter trend Tuesday, markets that start weak/strong end weak/strong and so on) but I showed some of the work of Jason Roney back in August




Another tidbit from Roney was an intraday update December 1 saying "looking back 30 years in the S&P to see what happens when the first day of the month closes up more than 1% and that close is at least a 30 day high close. There were 17 occurences and the month finished higher 88.25% of the time by an average 3.14%. There were 3 December occurences(89,97,03) all 3 closed higher." Knowing this December 1 was a good heads up to buy any dip this month. Seasonality said the buying point was going to closly follow that monster day Dec 1 and I said as much here December 2 "On a trading note, the statistical odds of a positive month was/is huge, but a retrace of all the gains Dec 1 is VERY possible, ,maybe starting Friday. This has been a good pattern for December, new high ,after new high in November, the first few days then retrace (or even go negative for the month) then finish higher by a few percent. As always not advice". This is what is meant by intelligent trading, making calculated decisions that try to give an edge.

Below is a rough draft for January in the yellow brackets. The thin yellow is a seasonality componant that hasn't been added to the raw model yet (the one in lime green). Also is the projector and the XT. I say rough draft because between now and Jan 1 anything can happen and so modeling this time of year is extremely risky. I usually wait for the first or second trading day of the year to make any reliable model. Just playing around.