join the experts with caution › aust_newsletter › fall › 20200530.pdf · using fx position...

May 30th, 2020 A publication of Algobot Pte Ltd CRN201604500D. Copyright © 2020

1

Weekly for Saturday May 30th, 2020. Based on Thursday’s Close

CONTENTS

JOIN THE EXPERTS WITH CAUTION pg1

USING FX POSITION RISK CALCULATIONS pg12 COMBATING LOSS TOLERANCE pg14

ONE IN SIX EXIT pg18 NEWSLETTER OUTLOOK: THREE BULLS IN A ROW pg22 PORTFOLIO CASE STUDIES: MONEY MANAGEMENT pg24

JOIN THE EXPERTS WITH CAUTION By Daryl Guppy We like experts, not because they are often correct, but because they draw in a

crowd that provides liquidity and trading opportunities. Last week the Australian Financial Review featured a list of 20 top stock picks from the Future Generation fund

manager’s forum. It’s notable that 11 of the 20 stocks identified were overseas listings and 5 of those were China listed stocks.

Our focus is on the Australian stocks, and we provide a very brief summary of each below.


2

We start with those we discarded and then look in detail at three good

candidates and how we settle on a single opportunity. ALX – this is a triangle breakout pattern that has already developed. It’s too

late to trade this pattern

CCP – this shows flagging momentum with developing downwards pressure ICQ- This is a great fast rally, but traders would need to chase the price to get

a position. Too late for entry. IDT – this shows spikey and erratic behaviour making it difficult to define the

trend and set a good stop.

JLG – no clear pattern or trend NCM – the price behaviour makes it difficult to set accurate or reliable stops

These leaves OPT, RHL and OPC as potential candidates. Our intention here is not to make any recombination but to show the processes we use to identify, analyse, and refine trade opportunities. We start with OPT.

OPT has proven the breakout is sustainable. The breakout has a weakness in that it uses the upsloping trend line as a resistance level. This limits some of the

upside as the price rise does not have a blue sky run. However, the GMMA relationships show a strong and steady uptrend. This is a longer-term steady uptrend trade example with upside resistance currently near $3.45.


3

RHC is also a breakout opportunity but it is both weaker and stronger than OPT.

It’s weaker because the initial breakout above the long term GMMA failed and developed a lower consolidation pattern. It is stronger because the new breakout is defined with a trend line support under the current price action. There is no upside

trend line resistance. The risk in this type of breakout is first the fast-up move. This will inevitably

pullback, potentially as low as $68 near the lower edge of the short term GMMA. This is a large pullback even though it remains consistent with the uptrend. The second risk is the narrow separation in the long term GMMA. This shows

weak investor support. The third risk factor is the placement of the stop loss. If the trend line is used,

then the stop loss is very near to the entry price. This increases the potential for a


4

false stop loss exit as price is clustering along the upper edge of the short term GMMA. The alternative stop loss conditions are a 1*ATR or the lower edge of the short

term GMMA.

OPC has what looks like a well-defined upward sloping triangle pattern. Its not

a perfect pattern because the base of the triangle is difficult to identify. Its made up of

7 days of trading, but the trading contains up and down days rather than the bulk of days moving in a single direction. That said, the pattern is otherwise well defined

with good resistance and a clear uptrend.


5

The case study entry is taken near $4.73 and close to the uptrend line stop loss

at $4.58. This puts $634.25 at risk, or 0.06% of total trading capital. The pattern target is $5.37.


6

CHINA UPDATE Friday last week the China market dramatically collapsed below the uptrend

line, but we still included our notes based on Thursdays close. We did have time to pull these notes out of the newsletter before Friday’s mail out, but we didn’t do this.

It’s not that we want to make ourselves look foolish. In this newsletter our aim to show the reality of trading and at times even the best analysis gets it wrong. Chart analysis is about identifying the balance of opportunities and that is rarely 100%. With

the Shanghai Index the minor part of the balance of probabilities turned out to be the correct analysis.

Traders protect themselves against these events by applying stop loss discipline.


7

PARABOLIC TRADE MANAGEMENT

Not every chart pattern develops as expected. The key management feature of a parabolic trend is the way prices can

drop rapidly when they move below the parabolic trend line. RSG developed

this behaviour and the intraday stop loss was triggered with an exit near $1.12. The delivered a small profit of $550.46 or 2.75%. With RSG the price

did not continue to drop rapidly, but the uptrend has stalled.


8

Monday the price gapped up well above our preferred entry point so the trade

was no taken. On Tuesday, the price dropped back and using the order line methods discussed in previous articles, an entry was taken at $1.09. The stop was at the value of the parabolic trend line at $1.00.

The stop puts $1651 at risk, or 1.6% of total trading capital. It’s a larger stop than we use in other trades. The upside target is the historical resistance level near

$1.28 which delivers a 17% return.


9

ECONOMIC RESTRUCTURING Much is being made about the need to stop sourcing products from China. Agree or disagree with this strategy, the size of this reallocation task is formidable.

This is a generational investment and not a trade opportunity.

You can download the ATR indicator for MT4 at

https://www.mql5.com/en/market/product/29683 Use this to improve your trade risk

management.

CASE STUDY EQUITY CURVE

The case study SBM trade is closed for a profit of $4691.36 or 23.46%. The

case study RSG trade is closed for a profit of $550.56 or 2.75%. The case study portfolio return is $64,578.92 or 64.6% for the period starting July 1, 2019 and

ending June 30, 2020.

https://www.mql5.com/en/market/product/29683


10

For the year starting July 1, 2018 – 2019 the case study portfolio return is $91,794 or 91.79%.

For the year starting July 1, 2017-2018, the case study portfolio return is

$115,330 or 115.3%. For the year starting July 1, 2016-2017, the case study portfolio return is $92,464.15 or 92.5%. For the year starting July 1, 2015- 2016, the

case study portfolio return is $156,450 or 156.45%. Equity trade size is generally kept constant at $20,000 in the case study

portfolio so it is easier to compare the case study trades over this and other years.

Unless otherwise noted in the trade management notes, all equity case study trades are managed on an end of day basis, with the exit taken at the best reasonable price

on the day after the stop loss is triggered. Warrant and CFD trades are generally kept constant at $10,000. Warrant and

CFD trades are closed on an intraday basis using a guaranteed stop loss as this is a

primary method of managing derivative risk. FX trades are generally kept constant at $5000. Stops are managed intraday.

This capital allocation reflects the risk in each of these asset classes.


11

https://academy.traderwave.com/a/26985/weZJ436F


12

USING FX POSITION RISK CALCULATIONS By Alex Douglas.

Turnover in the global foreign exchange markets now exceeds an average of

US$1.9 trillion per day – That’s US$1,900,000,000,000. The growth of the internet has now made it relatively simple for almost anybody to participate in this market

through specialist online FX brokers and companies offering CFD’s on select FX markets.

These online FX trading platforms provide traders with very significant leverage

on the funds in their trading accounts. Nearly all of them offer leverage of 50:1 while some go as high as 100:1 and even 400:1. A leverage rate of 50:1 simply means

that for every dollar in your account you will be able to take a fifty dollar position in the market. This is just another way of saying traders need only supply a 2% margin. The table shows the impact these various levels of leverage have on an account

balance of $5,000.

Of course, leverage is a double edged sword. Magnification of profit potential

through leverage is coupled with magnified risk. Calculating the risk on each trade is somewhat more cumbersome than is the case for a standard equities trade but with such high levels of leverage available it is a task that is more important than ever.

By converting risk & reward data back into the same currency as the trading account, the FX Position Risk Calculation gives users a clear and meaningful indication

of the amount of risk presented by each trade entered. This makes it very easy for traders to limit their risk per trade to a certain percentage of their trading account,

say 1% or 2%, by either adjusting their position size or adjusting entry &/or stop-loss levels. It will quickly become apparent to users of the calculator that it is rare that you would ever fully utilise leverage of 50:1, which makes leverage of 400:1 look

outrageously excessive. Users can modify the calculation to reflect any degree of leverage they choose.

The calculator will then apply this leverage to the account balance to show the user the amount of leveraged funds available for each trade, based upon the base currency of the pair that will be traded. For example, if the trading account is held in USD with

a balance of $5,000 and a leverage factor of 100, there will be USD$500,000 of leveraged funds available for trading any currency pair based in USD – in other words,

pairs that start with USD, such as USD-JPY, USD-CHF etc. However, if the same trader wanted to trade EUR-JPY, there would be only about EUR 402,600 of leveraged funds available (depending on the prevailing rates at the time of the trade).


13

In addition to presenting profit & loss figures as a percentage of the trading account balance, the FX Position Risk Calculation also presents the profit & loss results

in the same currency as that of the trading account. This may seem obvious, but if the account is held in USD and a position is taken is USD-JPY, the profit or loss on

such a trade would be in JPY. This is relatively simple to convert, but if the trade were EUR-JPY a further step is needed to convert the profit/loss back into USD. Having this process automated by the calculator makes it much easier to ensure you

are fully aware of the potential impact that each trade will have on your account balance.

Other information provided includes the value per pip for the intended position, converted to the currency of the trading account. A “pip” is simply the smallest change in price. For example, a move in AUD-USD from 0.6775 to 0.6776 is a 1-pip

move. In USD-JPY a move from 110.14 to 110.15 is a 1-pip move.

The calculation also shows the number of pips each trade will deliver at the

target price and at the stop-loss price, along with a calculation of Risk/Reward. A Risk/Reward figure of 3.5 indicates that the profit at the target price is 3.5 times larger than the initial risk between the entry price and the stop-loss.

The “intended position size” input field is where you enter the actual dollar amount (or EUR etc) of the trade. It is important to note that many online FX trading

platforms and providers of CFD’s will only allow you to trade in pre-determined blocks of either 100,000 currency units or 10,000 currency units. For example, a standard size block of USD100,000 or EUR100,000 or even AUD100,000 is often referred to as

“1-lot”. Some services also have a mini-contract which represents 10,000 currency units.

As there are no firm rules governing this, you must check carefully which system your intended trading platform uses. We have used raw currency amounts to allow maximum compatibility across all systems, even those which do not offer “lots”

but instead allow you to trade any amount you choose. Therefore, if you use a trading platform that offers positions in blocks, or “lots”, and you wish to trade 2-lots


14

of a standard sized contract, you would need to enter 200,000 as the intended position size.

Next week we examine an example of how these calculations are applied to

evaluate a trading opportunity. Alex Douglas is a FX trader and analyst who has worked with several

institutional FX trading desks.

COMBATING LOSS TOLERANCE By P Doggett

Many traders fail when it comes time to act on their risk control plans.

Cowardice takes over and they back away from action. Cowardice thrives when we

mismatch our intentions with our courage. All stop loss strategies require discipline, and a willingness to act. It is astounding just how many times we fail to act when stop

losses are hit. It is not a problem with the stop loss mechanism. Facing a loss, many traders

seem to find so many convenient excuses for cowardice. These excuses conceal the way we flinch or freeze just when action is required. The long-term prospect of financial loss is not enough to outweigh the immediate financial pain of executing a

stop loss order. The flinch factor stays our hand, and the stop loss order is never placed or acted upon.

Identifying these flinch and freeze points is an important step in developing an effective trading plan.

Ernst Webber conducted experiments during the 1800's on human perception.

His experiments had nothing to do with trading, but the results of one of these experiments are applicable to share traders today. The experiment we are interested

in went like this: Webber blindfolded a man and asked him to hold onto a weighted object. Webber gradually increased the weight and directed the man to tell him when he began to feel this increase.

What Webber discovered was that the smallest noticeable difference in weight was proportional to the starting value of the weight. For example, if the starting

weight is 2 kg, then one additional gram was barley noticed by the person carrying that weight, but 0.2 grams added to a 2kg weight did become noticeable. For 5kg, the threshold of noticeable increase in weight is 0.5 grams.

The proportional increase in weight relative to the original weight being carried was the important thing in his research and this relationship came to be known as

Webbers’ Law. So how does it apply to traders?

It applies in risk management. Let’s look at two hypothetical loss making

positions and two hypothetical profit making positions to see Webber’s law in action in the market when it comes to exiting a position.

Webber’s Law: Hypothetical loss making position # 1

Let’s assume you put $1000 into a position and you lose $100. You are down

10%. Most people can handle the loss at this point. It is the equivalent of only 1 additional

gram being placed onto a 2kg weight – barely noticeable. However, if you lose $200, you are down 20% and at about this point, many more people would start to feel the pain of the loss. Your risk threshold or tolerance level is beginning to be tested

because the loss is proportional to the starting capital. At this point you have to decide whether to sell and take the loss or hold on and hope that the stock will

bounce back.


15

Webber’s Law: Hypothetical loss making position # 2 Now let’s say you put $5000 into a position and you lose $100. You are no

longer down 10% as in the previous example and you are less likely to worry about the $100 deficit in your position given the small value of $100 relative to your starting

position of $5000. If the stock continues to fall and you are down $200, you are not down 20% as in the previous example and you do not reach the same feeling of loss at the same threshold level and therefore you do not reach the pivotal decision point

of whether you need to sell or hold as you did in the previous example. Webber's law states that your inflection point - or point of noticeable stimulus is

proportional to the beginning level of weight you are carrying. In trading terms, our beginning level of weight is our position size and the noticeable stimulus is our loss as a proportion of our starting position. So for someone with a position size of $1000, the

noticeable stimulus kicks in at around say, the $200 level because the position is down by 20%. With a $5000 position size, the noticeable stimulus or pain threshold

might also be around the same percentage level of 20% or $1000.


16

You can see the importance of the proportional relationship in Webber's law when it comes to deciding on your position size and how this will affect your ability to notice any losses that you are incurring. Someone with a $5000 position size requires

a lot more stimulus to feel weighed down by a loss than the person with a $1000 position size. The trader with a $5000 position size is typically going to lose more

money per losing trade in dollar terms than the trader with a $1000 position size given the figures used in our examples. Subsequently, the trader with the larger

position size is going to have to make proportionally greater profits to not only make back the lost money on losing trades, but to make sufficiently more money to be in front by the end of the trading year.

If every fourth trade is a winner, it needs to make at least $3000 just to recoup the losses of the last three trades. The trader’s account merely treads water. In

trading terms, we need to feel the stimulus of a loss (or additional weight), a lot earlier than that shown by Webber’s Law.

Keeping in mind all that we have just said, in the next article we consider Webber’s law as it relates to exiting profitable positions.


17

https://lp.gomarkets.com/trade-better/


18

ONE IN SIX EXIT By Daryl Guppy

The case study SBM trade performed well, but this is just one out of six

‘expert’ picks. Four out of six have failed. The remaining example, AZJ*, is struggling.

The main conclusion from this exercise is that ‘expert’ advice from brokers should always be assessed against your own chart analysis of the stock.

Several weeks ago, we assessed the stocks that Goldman Sachs has identified its top underappreciated defensive stock picks that should perform well through the

coronavirus crisis. These Aurizon, Freedom Foods, Charter Hall Social Infrastructure REIT, Cleanaway Waste, St Barbara, and Telstra. Not all of these made the cut when examined from a technical perspective.

This week we update the development and management of those that did make the cut.

AZJ*

This is a very slow-moving trade. The only change to management is a readjustment of the breakout target. Previously we measured the target from the first point of breakout above the downtrend line. This breakout failed.

The eventual beginning on the breakout was at the very apex of the triangle. The base of the triangle is projected upwards from this point and gives a new

upside target near $5.05. This delivers an 8% return. Equilateral triangles are weak chart patterns because they do not clearly

indicate the direction of a breakout. . The breakout on the upside is often slow and tentative. The downside breakouts can be very rapid. This pattern has no well-defined

breakout, so the lower trend line is projected forwards. This will act as the stop loss. Note that the trend line has been adjusted to include the down day that moved below the previous trend line plot.

On a purely discretionary basis, this trade would be closed. However, our purpose is to show the full consequences of disciplined trading, so this trade remains

open until the exit signal is confirmed.


19

The dominant feature on the chart is the equilateral triangle. This is a pattern of indecision because it gives no clear indication of the direction of the breakout. However, breakouts are often very strong and reach the projected targets quickly.

The triangle is not perfect and includes some overshoot bars. The entry signal is given near $4.66 by the move above the upper trend line. The upside target is the

width of the base projected upwards form the point of breakout. This gives an upside target near $5.17. Stop loss is the value of the trend line near $4.56.


20

This puts $429 at risk, or less than 0.05% of trading capital. As the trend

develops a different stop loss method will be applied. This may be an ATR or a trend

line. The trade may be executed as a CFD, although the available leverage is low. It

may also be used to add to an existing longer-term open position in AZJ for those who already hold this as an investment.

ATR BREAKOUT There is no upside target for this trade. This trade is deep in the money

– making a good profit – so the exit is based on indicator conditions rather than price targets. A close below the ATR line is an exit warning signal.

This signal was delivered with a gap down below the ATR line. The exit

was taken on then next day near $3.00. This delivered a profit of $4691.36 or 23.46%.

SBM is a good example of an ATR breakout with an entry signalled around $2.25 when the long-side ATR moved above the short side ATR. Aggressive traders who missed the first entry conditions join the uptrend as price drops towards the

value of the ATR. This is joining an established uptrend rather that taking a larger risk in the early stages of the breakout. The breakout trend is confirmed by GMMA

analysis. The long term GMMA has turned upwards and has been successfully tested as a support feature on two occasions.


21

For case study purposes the entry is at $2.43 with the stop loss at the value of the ATR line at $2.38. This puts $411 at risk or less than 0.05% of total trading capital. Target is near $30.00, but the trade is managed with the ATR line.

We continue to bring readers updated management notes on these case study

trades over the coming weeks.


22

NEWSLETTER OUTLOOK: THREE BULLS IN A ROW By Daryl Guppy

The first chart-based upside target for the XJO is 5960. This is below

the popular round figure of 6000 used by the media. The next target is 6120. The third target is between 66350 and 6400.

The ATR applied to the XJO shows a clear uptrend. The XJO behaviour doesn’t allow for the setting of targets so this rise is managed with a volatility-based stop loss.

A simple trend line applied to the XJO further defines the progress of the uptrend. Note that this is not an upward sloping triangle pattern because

there is no valid base for the pattern. However, the move above the resistance level is bullish.


23

The GMMA relationships show the long term GMMA compressing and the short term GMMA moving above the upper edge of the long term GMMA. These are bullish conditions.


24

PORTFOLIO CASE STUDIES: MONEY MANAGEMENT

Starting cash position $100,000 - no brokerage or slippage 2% of risk = $2,000 NOTE Entered date is the newsletter date which contains the case study discussion.

OVERALL PROFIT TO DATE

The case study SBM trade is closed for a profit of $4691.36 or 23.46%. The case study RSG trade is closed for a profit of $550.56 or 2.75%. The case study portfolio return is $64,578.92 or 64.6% for the period starting July 1, 2019 and

ending June 30, 2020. For the year starting July 1, 2018 – 2019 the case study portfolio return is

$91,794 or 91.79%. The case study portfolio return is $156,450 or 156.45% for the period starting

July 1, 2016-2017. Note that this includes 6 to 21 trade results. The case study

portfolio return is $92,464.15 or 92.5% for the period starting July 1, 2015- 2016.


25

Equity trade size is generally kept constant at $20,000 in the case study portfolio so it is easier to compare the case study trades over this and other years. Unless otherwise noted in the trade management notes, all equity case study trades are managed on

an end of day basis, with the exit taken at the best reasonable price on the day after the stop loss is triggered.

CUSTOMER CAUTION NOTICE AND COPYRIGHT

Algobot Pte Ltd (CRN 201604500D) Pte Ltd is not a licensed investment advisor. This publication, which is generally available to the public, falls under the Singapore Media Advice provisions. The information provided is for educational purposes only and does not constitute financial product advice. These analysis notes are based on our experience of applying technical analysis to the market and are designed to be used as a tutorial showing how technical analysis can be applied to a chart example based on recent trading data. This newsletter is a tool to assist you in your personal judgment. It is not designed to replace your Licensed Financial Consultant or your Stockbroker. It has been prepared without regard to

any particular person's investment objectives, financial situation and particular needs because readers come from diverse backgrounds, with diverse objectives and financial situations. This information is of a general nature only so you should seek independent advice from your broker or other investment advisors as appropriate before taking any action. The publication should not be construed by any reader as Publisher's (i) solicitation to effect, or attempt to effect transactions in securities, or (ii) provision of

any investment related advice or services tailored to any particular individual's financial situation or

investment objective(s). Readers do not receive investment advisory, investment supervisory or investment management services, nor the initial or ongoing review or monitoring of the reader's individual investment portfolio or individual particular needs. Therefore, no reader should assume that the Publisher serves as a substitute for individual personalized advice from a licensed financial professional of the reader's choosing. The decision to trade and the method of trading is for the reader alone to decide. The reader maintains absolute discretion as to whether or not to follow any portion of our content. Publisher does not offer or provide any implementation services, nor does it offer or provide

initial or ongoing individual personalized advice. It remains the reader's exclusive responsibility to review and evaluate the content and to determine whether to accept or reject any strategy and to correspondingly determine whether any such strategy is appropriate for a reader's individual situation. Publisher expresses no opinion as to whether any of strategy contained on this publication is appropriate for a reader's individual situation. The author and publisher expressly disclaim all and any liability to any person, whether the purchase of this publication or not, in respect of anything and of the consequences of any thing done or omitted to be done by any such person in reliance, whether whole or partial, upon

the whole or any part of the contents of this publication. Neither Algobot Pte Limited nor its officers, employees and agents, will be liable for any loss or damage incurred by any person directly or indirectly

as a result of reliance on the information contained in this publication. The information contained in this newsletter is copyright and for the sole use of trial and prepaid readers. It cannot be circulated to other readers without the permission of the publisher. Each issue now incorporates fingerprint protection that enables us to track the original source of pirate copies. If we find that you are redistributing the

newsletter then, at our discretion, we will reduce the length of your paid subscription by the value of the multiple copies we believe you are circulating. Share with nine friends, and we cut your subscription period by 90%. Contributed materials reflect the personal opinion of the authors and are not necessarily those of the publisher. Articles accurately reflect the personal views of the authors. Stocks held by the authors are marked* and are not to be taken as a trading recommendation. This is not a newsletter of stock tips. Case study trades are notional and analysed in real time on a weekly basis. Any past investment-related performance .

referred to may not be indicative of future results, and therefore, no reader should assume that the future performance of any specific investment, investment strategy will be suitable or profitable for a reader's portfolio, or equal historical or anticipated performance level(s). Algobot Pte Ltd does not receive any benefit or fee from any of the stocks reviewed in the newsletter. Algobot Pte Ltd is an independent international financial education organization and research is supported by subscription fees. Please note that in the interest of timely publication of the newsletter, this document may be incompletely proofed.

OFFICES; Algobot Pte Ltd Head Office, 20 Cecil Street,#20-01 Equity Plaza, Singapore 049705, Singapore, 22 Hibernia Crescent, Brinkin, Darwin, Australia, Room B105-A17, No.14, Chaoyangmen Nandajie, Chaoyang District, Beijing, China.

join the experts with caution › aust_newsletter › fall › 20200530.pdf · using fx position...

Documents