Better Trader

Questioning my Discipline As The Market Stays Strong

By The Disciplined Trader

Since opening my short position on the S&P 500 a few weeks ago at 1560, the drop I was anticipating has failed to materialise. I was so sure the decline was imminent hence I felt confident enough to raise my stop to give the trade room to breathe. However, this action defied one of my strict trading rules, that of - if a trade is not in profit after a week or two then it should be closed.

As the S&P moves back to my opening level of 1560 I have to adhere to this rule and close my position for break even. I follow a strict code of trading with disciplined rules and I follow those rules for good reason. I’ve learnt the hard way that when you stray from your path then your trading plan is probably not right. Raising stops, changing your system, increasing margin and other capricious actions should always be questioned when your trade is not going your way, it means emotional attachment is getting in the way of rational thinking and discipline. My trade should have shown a profit right from the start, that was my plan but that didn’t happen, so I have taken the steps to protect my capital and covered.

At this moment in time I couldn’t tell you why my trade didn’t work out or why the market remains strong, perhaps the bullish cycle has not quite exhausted yet, it certainly looks more likely that the S&P will reach new highs just like the Dow did a few weeks ago. Let’s not forget that there’s an army of bulls chasing this index higher! There’s a chance that it’s tracing out an ending diagonal, which is described in the FTSE 100 short term forecast (for members only), if this is the case then the rally will end near 1572.

In Europe however, the FTSE has more bearish chart action than the S&P, it’s well below its previous high and looks less likely to rally much further from here. Should sparks of bullish momentum push the FTSE higher, I’ll be watching 6500 for a potential selling opportunity.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

The Stock Market Takes a Reality Check

By The Disciplined Trader

Two weeks ago stock market expectations were high with no imminent weakness apparent, everyone cheered as the Dow hit the headlines by making a new all-time high. But when exuberance and hype are abundant the irony is that stock markets will often turn down, you see stock market declines can happen when they are least expected and catch many people unaware. I could see that coming two weeks ago when I went short the S&P 500 from 1560.

So far the European markets have been hit the hardest and are tumbling. The S&P is more resilient but my well-timed short position is 10 points onside and I’m maintaining my view that the S&P will join the European march lower.

The divergence I mentioned in my last article between the S&P and the Dow Jones was the first warning shot of a potential reversal. The second warning was fired when the e-Yield Sentiment Indicator (for premium members) turned down on 28th February. When sentiment receded and the stock market continued to rise the indicator confirmed a bearish divergence and my trading alert to go short was rightly triggered.

The European financial crisis looks likely to return and kick start a new bear market into action, but the question is - has it already begun? There are early warning signs resurfacing as the people of Cyprus experience the crisis first-hand. I’m expecting contagion to other European countries and as a nod to further downside risk, I’m remaining short.

Even though I’m not anticipating any more rallies as I believe upside from here is limited, there’s still the outside chance of the S&P making a new high near 1570. However, I feel strongly about further downside potential, so to protect my position from any positive knee-jerk reactions I’m raising my stop from 1580 to 1585.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

The Old Man of Wall Street’s New High Confirms a Sell Signal

By The Disciplined Trader

When I wrote my last article two weeks ago a struggle between the bulls and bears was underway. This battle was won by the bulls and since the 25th February the markets have marched higher to see the 117-year ‘old man of Wall Street’ the Dow Jones put in a new all-time high of 14,355. This wouldn’t be unusual if the rest of the market had followed suit. However, most of the other major indices including the S&P 500 have failed to make new highs.

This divergence between the Dow and the S&P is not unusual though and under normal market conditions the S&P eventually catches up to confirm the market strength. But when markets are overbought this relationship doesn’t necessarily work in the same way.  The RSI on the 2-hour chart is overbought so my trading system is alerting me to a sell signal and confirming a fractured market.

The all-time high on the S&P is 1576 and the current price is 27 points lower, together with the overbought conditions it seems highly unlikely that the index has enough momentum to push through and reach that level.

With today’s nonfarm payroll report imminent, I’m anticipating a push to the 1560 area - that will be the level where I go short. Just below the all-time high is a resistance line crossing 1571, this level is an important line in the sand. If the S&P is about to turn down it should do so below 1571. My stop loss is 1580.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

The Decline Arrives When Least Anticipated

By The Disciplined Trader

When I wrote my last article two weeks ago the markets were overbought and I was looking for a pullback to cover my short position from 1514 on the S&P 500. At the time I had doubts that this was going to happen because the RSI had confirmed the strength by making a new high and the price action remained resolutely strong after a short pullback failed to follow through. My break-even stop was taken and I found myself flat as the market meandered higher and my patience ran thin.

To my frustration the S&P hit resistance at 1530 and from there began its decline. I was early and right but the tricky tape called my bluff and shook me from my winning trade. The market is often full of tricks like this and that’s why many traders lose money and eventually quit. They are tricked into doing the wrong thing even when their strategy and call is right.  I was caught out by one such trick, yet having the right strategy makes it even more frustrating.

Usually when a market shows resilient strength for longer than traders anticipate, the bullish psychological effects tempt fateas more bulls join the late trade. This can result in the ‘band wagon’ effect. Everyone jumps aboard the wagon as it races up the hill, eventually the weight is too much and it lurches to a halt, the wagon then begins to reverse until everyone is jumping off in fear.  When this happens not many traders go short as the strength has fooled everyone into bullish thinking, long profits slip and those trades eventually stop out as the descent takes hold and prices fall in earnest.

I’m monitoring this decline carefully and I will be watching my indicators looking to buy the indices when I detect the next potential bottom. Although this will probably be from lower levels around 6200 support in the FTSE 100.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

Short Order Filled as Market Remains Static

By The Disciplined Trader

My limit order to sell the S&P 500 was filled at 1514 at the beginning of the week. A short decline followed but was short lived as the bulls fought back and took the price back to my entry level. Today the market can’t seem to decide its fate and an opening decline has rallied it back to 1510. My short position is showing a small profit but I am concerned by this latest bounce.

In my view when the market is ready to drop it will do so quickly without a fight. After rising too far and too fast it becomes over-stretched like a rubber band, so any impending drop is usually swift and fast, snapping the market into correction mode as traders run for cover. As I write the S&P sits at 1510 after having rallied from a low of 1498. It’s not complying with this observation. Hence, to cover my risk I’m moving my stop down from 1550 to my entry level of 1514. If the S&P pushes higher at least I won’t lose.

Analysing and understanding price behaviour is hugely important to trading, when the market does not behave as it should that usually means something is wrong and positions should be reassessed. My suspicions that the market is not yet ready for a correction can be seen in the behaviour of the RSI. It has fallen from the highs in January and is no longer over-bought yet the S&P is still trading near the high.

Good money management is paramount to my success. If the market does decide to correct from here then my trade will profit, otherwise I am happy to exit at breakeven with no loss to my trading capital.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

Evaluating the Current Trend on the S&P 500

By The Disciplined Trader

The markets continued to rally as I had anticipated last week and my limit sell order lay waiting for what I thought would be an inevitable trade at 1511.  Only it remained unfilled as the S&P 500 topped at just half a point shy and then began its descent.

The pullback has alleviated the market’s overbought condition to a degree and my RSI trading signal is no longer screaming ‘sell’! So I pulled my short order and remain on the sidelinesfeeling unsure about whether a tradeable decline has begun and aware of the potential for further upside from here.

In my experience and given the strength of the rally in January, I believe that there will be another leg up. The RSI has just hit one of the highest levels in 17 years, confirming the bullish market momentum and underlying strength. In RSI history this high is unusual and the extreme bullish market sentiment should not be brushed aside as a contrarian indicator yet.

I’ve learnt that extreme sentiment like this does fuel further rallies, often to new highs and without any meaningful corrections becoming a path of frustration for the bears. With this is mind I’m watching for new highs on the index to be met with negative divergence on the RSI. This is when the RSI indicator does not make a new high as well and bearish divergence is confirmed.

I believe this divergence will mark an end to the rally. I have therefore raised my limit sell order to 1514. I’m expecting a push to the long term trendline at 1517. My stop loss is 1550 with a target of 1460.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

Waiting for the Fade Trade

By The Disciplined Trader

The January rally continues unabated and my feelings that a decent trading opportunity to short are growing stronger. It was wise to wait for more indications of a top as this rally has gone further than I anticipated. Being position-free leaves me in a good place feeling more confident to trade. I’m sensing a reversal maybe close at hand.

My reasons for thinking this are as follows:

•    The FTSE 100 RSI daily chart became overbought on 4th January
•    The S&P 500 RSI daily chart became overbought on 22 January
•    The S&P 500 is nearing a crucial resistance level of 1516
•    e-Yield’s 13-day BTI has given a sell signal
•    Bullish enthusiasm is becoming rampant

Investors are chasing stocks higher and the FTSE and S&P are looking stretched and tired. It’s a dangerous game to battle against the trend, so I have put a plan of action in place to trade and now I’m ready to go short.

I am watching the long-term resistance line crossing 1516 on the S&P (from the highs on 2nd April 2012 and 14th September 2012). Given the overbought condition I expect the S&P to top below that line. The 13-day BTI, a timing indicator from www.e-yield.com, has given a sell signal. This indicator has a good track record at finding tops and for this reason I am confident the S&P will top below 1516.

The market does not always decline immediately after a sell signal, even if its reliability is high. Therefore I have placed a limit order to sell the S&P 500 CFD just below resistance at 1511, with a stop loss at 1540. My target is 1460.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

Fiscal Cliff Diversion Sends the Markets Soaring in 2013

By The Disciplined Trader

The New Year for stocks has started with a bang and added over 3% to both the FTSE 100 and S&P 500. Budget action in the U.S. has cheered Wall Street and sent a wave of optimism globally across the financial markets. U.S. lawmakers have passed a bill to avoid the fiscal cliff sending stocks soaring. In Europe the FTSE and DAX are at multi-year highs and the S&P is not too far behind.

With all its controversy the Fiscal Cliff dilemma looks to have been averted and the market has looked on the bright side. But I’m a little surprised by this reaction as it’s merely a temporary measure and an obvious compromise. Come February, the issue will rise to the fore and market jitters will return once more. This postponement may have saved American’s from tax hikes for now but there remain many unresolved questions, not to mention a government still spending much more than it takes in.

With the earnings season upon us it’s not without reason that a momentum fuelled rally could continue until the end of January.One thing I have learned over many years of trading is that analysts tend to err on the side of caution with earnings and will often underestimate, so when companies report the markets will invariably rise.

With this in mind I am reluctant to go short. It’s a pity because markets are overbought on the RSI, which is alerting my system to sell. On the flipside I can’t buy either because I only buy when the markets are oversold.

Patience is required before I place my first trade in 2013. A more fitting opportunity will eventually appear and when it does I’ll be ready to act.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

Reflecting on a Disciplined Path to Profits

By The Disciplined Trader

As 2012 draws to a close I am pleased to report a worthytrading performance for the year. Since I started writing this column in March, I have made a total of 820 points trading just three markets, namely the FTSE 100, the S&P 500 and EUR/USD. Despite hitting the trading button only eight times, it’s satisfying to know that my acts of discipline and patience have paid off and manifested into trading profits.

My strategy worked well in 2012. I adopted a swing trading strategy designed to catch the big moves by using wide stop losses and even wider targets. My strategy, as a design of discipline, also forced me to wait until all my trading system boxes were ticked, only when each signal was in place did I enter into the trading arena. I waited patiently for opportunities to buy low when the market was oversold and sell high when the market was overbought, using momentum indicators and moving averages to time my entry and keep risk at bay.

The bottom line is that anyone can profit with a simple strategy. The key is discipline and patience. Do not be tempted to trade often and always wait for the right opportunity. Being able to sit tight in this way shows wisdom over impulsiveness, and invariably leads to success. Too many people fail because of impatience. They over-trade and therefore miss the best opportunities when the high probability trades present – usually because they are stuck in a losing position. Discipline and patience will ensure that the winning trades find you. By utilising a longer term strategy with less trading and wider stops your trades will naturally be of a higher quality and more likely lead to profits.

The path to profits has been my destination for 2012 and I hope you have enjoyed the ride.The Disciplined Trader will be back in the New Year with more trading insights and principles.

Have a Merry Christmas and a Happy New Year.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.

The Seasonal Momentum Trade Enforces My Trading Discipline

By The Disciplined Trader

As the cold winter hits home the stock market continues to look strong. History shows that December is far from a cold month for the stock market, in fact it’s typically a hot time for stocks where seasonality boosts momentum to fuel a Santa rally.The odds favouring a rally in December are high - with shares rising 80% of the time during this festive period.

But I’m feeling a sense of unease which makes me unsure of climbing on-board this seasonal train. My main causes for concern lie in the conflicting signals of where the market sits technically versus the current bullish seasonality. History is telling me to buy while my technical indicators are hitting critical sell levels and indicating it’s time to go short.

With technical signs flying in the face of tradition it’s no wonder that choosing a side is hard. But I must make a decision. If I don’t trade does that mean I have lost my discipline? No. My immediate decision is to remain on the sidelines as a mark of discipline and respect toward seasonality and to await the next opportunity. My technical indicators are signalling caution to the bulls and the indices are overbought so I’m erring on the side of bearish caution and favouring the sell-side trade.

But in which market? The RSI indicator on the 2-hourly charts of the S&P 500 became overbought on the 23rdNovember and the FTSE followed the 29th.  In addition to this another useful technical tool I use is the 55-day moving average, on the S&P this moving average is declining confirming that the trend is down. However the FTSE’s 55-day MA is no longer in decline.

So with the FTSE failing to tick all the boxes I’m favouring a short trade on the S&P. The trend is down plus it’s overbought - tick, tick. But with a positive seasonal influence I’m forced to hold fire until a better opportunity presents. Now that’s what I call discipline.

The Disciplined Trader is an average guy who has little fundamental knowledge of the financial markets, yet he consistently makes money trading. He simply applies the basic rules of trading discussed in bettertrader.co.uk and executes his trading techniques applying great discipline.