Tonight I received an e-mail from Ameritrade informing me that they now have pattern recognition software for retail traders. As soon as I saw this I got to wondering if trading patterns has become too popular.Almost every night on Fast Money they have a chartist on the show. When they started the show the only one using charts to any extent was Eric Bolling. The other traders would basically roll their eyes when he pulled up charts during the show. Not so anymore. Almost every blog I visit is loaded with charts full of patterns, trend lines, support and resistance, etc. etc. Mine included.
While I was reluctant to come around to trading patterns I have to admit that they often worked probably more than 50% of the time. More than 50% defines an edge. If you have an edge you can probably make money in the market.
Now one thing I can tell you is that when something works for very long the market will eventually discount it and your edge will disappear. The three charts are examples of widely recognised patterns that did not "work" as expected.
Somebody once said that speculating in the market comes down to anticipating the anticipators.
When I received tonights update it started to dawn on me that the smart money is probably starting to anticipate the pattern traders. I expect the more obvious patterns are going to work out less and less frequently.
Posts
15 comments:
Gary, well it comes down to the market taking the most money it can away from people. I guess this is just a continuation of that theme.
with so much bearishness on crude, high likely that crude will go up 20-30 dollars next week. And probably will see 200 in June, according to the philanthropists at goldman sachs.
Screw gold and silver, buy crude contracts baby. A barrel of crude soon will be more expensive than an ounce of gold. Crude will beat gold to 1000.
A great example can be seen on the DBA etf (agriculture). Many people on different blogs are excited about the "breakdown", which looks to have occurred several times right before turning higher again. One day it will be a breakdown, but nobody can tell until weeks after it's done. IF I were to trade DBA today, and hold several days/weeks, it would still be from the long side!
The DBA etf "breakdown" at $36 offers a great example. Last few times it breached this area, it turned higher soon after. IF I were to trade this etf for the next several days/weeks, it'd be a long in my book. Fact is, nobody can tell if the breach was a breakdown until weeks later!
I suspect the cubes are going to break out also drawing in everyone before turning south.
While I do agreethe most "obvious" patterns can and sometimes will be played or manipulated to catch the TA traders, your images are lacking the most important aspect in any pattern recognition, VOLUME. I have been a staunch voice about the importance of volume in any trade. I know at one time you and trade-it dismissed it wholeheartedly, and even suggested it was manipulated, but it is a traders one true ally.
Learn to intepret volume correctly and the majority of pattern plays will be non-valid long before you get sucked in.
As I've stated many,many times here before, I almost always wait for confirmation of the pattern if all signals line up before hand or set entries so as to limit risk by knowing I'm wrong almost immediately.
The H&S shoulders as been a favorite of the market makers for a while now, but with patience and correct observation they can be played profitably eventually most times. As long as you realise the makers will run in the shorts a few times before the breakdown usually occurs.
Sometimes a failed signal can be a better one. Jack Schwagger alludes to that often. One just needs to know actually constitutes a failed signal not just a "run-in".
The 1rst two charts have no volume so I'd never even consider those at all, even though the first has yet to play out or even negate the pattern, the second wouldn't fit my criteria for a "expanding wedge"or a "meagphone top" anyway.
The third is a triangle. A continuation pattern which is what it turned out to be albeit for a retest of the prior lows only. But the volume clues are all apparent on that chart if known what to look for.
I do like the continuation trangle though that formed in the first couple of weeks in Jan. A nice drop of @125 points, a traingle consolidation and a new breakdown of almost the exact same points @ 125.
All said,I do agree though, patterns can and will fail alot. The idea is to play those with the most chance of success by not trading all patterns only those with a smart risk/reward enrty, and the most odds in your favor, which is many,many more factors than just the shape of the patterns.
Monetary base is up again, 3rd week in a row..M2 up big again, FED balance sheet taking on more crap..and now FED vice chair KOHN says 'HE hasn't DECIDED whether investment banks should continue to get money'at the begging window. And KING George told us couple years back HE was the Decider...and we all thought it was the Constitution and Congress that was the Decider..silly Americans..tricks are for kids.....and which one of the all the THIEVES in the DEN of THIEVES do folks want to vote for? one couldn't have wrote the present story a hundred years ago with anyone believing it was nothing more than fiction...
So the new Decider, Don Kohn wants to take 'foreign crap' at the begging window..all underwritten by American taxpayers...swell
WASHINGTON (MarketWatch) -- The Federal Reserve is actively considering creation of a lending facility that would accept "very safe" foreign collateral from "sound" global banks in case of a widespread liquidity crisis, Fed Vice Chairman Donald Kohn said Thursday.
A new global discount window is "under active study," Kohn said. "It is possible that over time, major central banks could perhaps agree to accept a common pool of very safe collateral, facilitating the liquidity management of global banks," he said, stipulating that such loans only be made to sound institutions.
If you guys think the market is going to break significantly lower, you should already be short and not worry about a fake to the upside first. What if you're wrong about the upside part? You will ahve a hard time getting short if you miss the first 2% drop.
Doc,
Exactly why I put on half my position yesterday.
Gary:
Received your weekend letter, complete with Richard Russell quote "I don’t see any world shattering new product or invention that is destined to change the way the world operates. There are no canals, railroads, cars, telephones, TV’s computers or internets coming to or about to hit the market right now. Without a paradigm shift in the way the world operates I don’t see any reason for a new bull market to start. Eventually we will see a world changing idea and one that will drive the next huge bull market."
Well, on Thursday this news came out: “A Japanese scientist was supposedly able to start a cold fusion reaction earlier this week, which—if the results are real—could revolutionize the way we gather energy. Yoshiaki Arata, a highly respected physicist in Japan, demonstrated a low-energy nuclear reaction at Osaka University on Thursday. In front of a live audience, including reporters from six major newspapers and two TV studios, Arata and a co-professor Yue-Chang Zhang, produced excess heat and helium atoms from deuterium gas.”
http://gizmodo.com/393119/scientist-
creates-cold-fusion-for-the-first-
time-in-decades
Interesting. New bull market paradigm shift? Sell uranium?
Regards,
Jim
Jim,
Actually that was my quote.
Regardless if cold fusion is possible and reproducible to a large scale then yes we will have a paradigm shift in the way the world gets energy. Although I expect it will take years to develop and bring enough infrastructure online to make it widely feasible.
During that period commodity prices will still rise. It does set the stage for the eventual end of the commodity bull though.
Re-upped!
Best $100 I spent last year, and this.
Eff the haters, Gary's a good man, in every sense of the word.
Jim:
Also don't forget, what year was the internet invented and when did it hit "critical mass?" The process can take years, possibly decades. If the latest greatest energy technology came out tomorrow, it would take probably 10 to 15 years for it to get into wide circulation, and that is assuming very, very rapid adoption.
This commodity bull is expected to have another 7 to 10 years in front of it. I don't think we have to worry it will end anytime soon.
today i am just searching google for various newsletters specifically on gold. Essentially i am searching for newsletters which focuses on fundamental as well as technicall analysis. If anyone know any such newsletters please post a link. Thanks
Post a Comment