A Discounted View

Atlassian Corp (TEAM) had its initial public offering (IPO) in December 2015. Since that time the price has displayed interesting behavior from a long perspective . During the beginning of 2016 TEAM declined rapidly along with the rest of the market  as global economic fears were pervasive among market participants. Since that decline, TEAM found support  in early February 2016 as seen by the two reversal candlesticks  on the weekly chart.  The weekly reversals in price  were accompanied by an increase in volume both weeks which indicated that $20 is a meaningful level of support  from a weekly bar perspective. In mid-May 2016 TEAM formed a higher low around $22 and also exhibited a reversal candlestick at this level. Upon clearing prior resistance  in June 2016 volume accelerated again for four weeks indicating conviction in the move higher . Zooming in one order of magnitude shorter, the daily chart shows that after the breakout out ...

The price of ResMed Inc. (RMD) recently broke out of a resistance barrier on multiple timeframes. First, the monthly chart shows a clear break of resistance near the $60 level. Historically, this behavior in RMD and other stocks is constructive for a long set up . You can see from the past 10 years of monthly price data that RMD has a tendency to trend, consolidate for a while, and then trend again . At the point of breakout, a long position was unconfirmed by MACD, a trend indicator , but with further price improvement it exhibited a bullish crossover. Additionally, comparing RMD’s lows in its most recent range bound consolidation with MACD-H confirms its advance leading up to its breakout. Second, after zooming in one order of magnitude  shorter to the weekly time frame you can see a more granular view of the breakout from the monthly chart. From a trend perspective  we now see the price above its 40-week moving average ( 200SMA ) and a fairly consistent bottom ...

In his book, Trading Systems and Methods, Perry Kaufman provides some simple, non-mathematical rules that all traders should employ when running a trading program. While there is a purpose and time for using statistics and more advanced mathematical concepts to manage risk, these guidelines will help keep your trading on the path to profitability.   Only risk a small amount of total capital on any one trade . This suggestion echoes the teaching of Dr. Alexander Elder who popularized the 2% Rule . Simply put, when trading you should never exceed a particular amount of risk in any one position that could compromise your performance. In the futures industry, risk-based position sizing algorithms  are commonly used to determine the ideal position size or Optimal f. Know your exit conditions in advance . Kaufman states that “There should be a clear exit criterion for every trade, even if the exact loss cannot be known in advance.” I...

In November 2005 Cole Wilcox and Eric Crittenden of Blackstar Funds LLC* (now Longboard Asset Management) published a research report analyzing the effectiveness in using a Trend Following   trading strategy in the US equity markets.   Both fund managers were using Trend Following successfully in the futures markets for many years.   Their success with Trend Following, as well as their peer's results in similar markets , piqued their curiosity and led them to conduct this research.   The strategy tested is a long-only Trend Following program. Trend Following uses absolute price change to delineate strength or weakness in a particular security. In this case, the researchers added long exposure on positive absolute price changes that resulted in an all-time high on a one week closing basis. Before actual testing began, Wilcox and Crittenden made sure to address any data issues. For example, given the expansive time horizon for testing, the authors account ...

In The New Trading for a Living , Dr. Alexander Elder suggests two methods for controlling risk. Previously I wrote about how the 2% Rule  will mitigate risk when building a position. Elder’s other risk guideline, the 6% Rule, can be used to minimize risk at the portfolio level. Just as the 2% Rule puts solid risk management in place at the position level, the 6% Rule provides a useful risk constraint for the entire portfolio. Specifically, the 6% Rule restricts traders from allowing total outstanding risk of all positions to exceed 6% of the portfolio value as of prior month-end. The 6% Rule protects your account from incurring a series of small losses that amount to one large, meaningful loss. For example, a 1% loss may seem innocuous however once a series of five or more of these accumulate in your account in one month the losses will begin to be felt both financially and psychologically. To an extent, the 6% Rule works against human nature. That is, as traders begin to...

Executing sound risk management principles in your trading is essential to having any chance of investment survival. If one position is sized too large and generates an enormous loss, this can be catastrophic to your account as well as your psychology as a trader. Fortunately, there are methods you can learn that will protect your account. In The New Trading for a Living , Dr. Alexander Elder proposes a method for controlling risk at the position level which he calls the 2% Rule. This guideline states that the total risk in any position cannot exceed 2% of the current month-end account value. For example, if you have $100,000 in your account at the end of the previous month, the 2% Rule limits your maximum risk on any trade to $2,000. That is, risk is defined as the dollar value of the difference between your purchase price and stop loss and cannot exceed 2% of the account value under this rule. Be sure to not confuse 2% with the total position size. While 2% may seem sm...

"The Yen has a tendency to trend, take a timeout, and then trend again" - Stanley Druckenmiller, 2015 Since the end of 2015 USDJPY has been forming a trading range between 115 and 125. This past week the currency pair closed below 115 with a breakout to the downside. Clearly, many market participants have been monitoring these levels in anticipation of a swift move out of the consolidation that lasted over a year. Accordingly, most of the initial move was absorbed this week. However, there is still some room for the pair to decline to the next level of support around 110. Some technicians may argue that the consolidation resembles a Head and Shoulders pattern. While there is some reliability in pattern recognition, I believe it is more important to identify the meaning of a pattern. In other words, a Head and Shoulders arrangement is a sign of distribution often seen around price tops. In fact, USDJPY began forming a series of Lower-Highs and Lower-Lows on a weekly b...

At the moment, there may be some bullish divergence  emerging in the daily chart of the S&P 500 (SPX) and Russell 2000 (RUT). Divergence between a price and an oscillator can be a reliable harbinger of future price moves. Since the beginning of 2016 SPX has been in a strong, sustained downtrend. However, a pivot low was formed in the middle of January and now it appears as though another price pivot could be establishing itself in the beginning half of February. Granted, the price action year to date has formed a series of lower-lows which is often interpreted as a bearish sign. Yet, when there is bullish divergence in a price-based indicator it often leads to a swift reversal of prior price action. For example, in the chart below it can be seen how the price trend of SPX has diverged from that of two of its oscillators. That is, the oscillators have formed potential higher-highs since the beginning of 2016. This could be indicative of impending bullish price action in the...

Despite the title of this post, the curious development of animal anatomy will not be the topic of discussion. Instead, readers will have an opportunity to observe a potential reversal move underway in equity markets and crude oil delineated by this distinctive price action. No trend can last indefinitely and being able to spot signs of a reversal will help a trader better manage a position. One such method is identification of price action through what Dr. Alexander Elder describes as Kangaroo Tails. This sort of price behavior has a unique pattern. Elder states, “A Kangaroo Tail consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices” (How to Trade for a Living, 65). Kangaroo tails that close down indicate a potential market top whereas when it closes up a possible reversal higher is developing. As with most patterns, price action on a long term basis usually carries more weight as it represents a general shift in the market ...

In trading, controlling the risk in a portfolio is determined by position sizing.  Most trading firms employ a fixed fractional contract position sizing method.  Under this methodology, positions are determined using the following formula: Fixed fractional bet sizing: Amount risked per trade = closing equity * fixed percentage risked per trade (e.g. 25bps) Once the Fixed-Fractional Contract Position Sizing Formula has been used to calculate the amount of risk to put on with a trade (in dollar terms), the Risk-Basis Position Sizing method is employed to determine how many shares or contracts of an instrument to buy or sell.  The Risk-Basis Position Sizing method considers the risk for each security, where risk per share is the entry price minus the stop-loss point.  It divides the total risk allowance (e.g. 25bps in dollar terms) by the risk per share to determine the number of shares to trade.  Legendary systems and Trend Following trader Ed Seykota o...