Good traders are good fortune tellers
Dear Trading Diary: While timing certainly is not everything – as the popular saying goes – it is an essential element of a successful trading career. Not so much in investing as shares are usually bought with 100% cash and many investors can withstand a much deeper correction than can traders. In spread betting/CFD trading, lots of margin is borrowed such that even a 10% wrong way move will wipe out 100% of a 10x leveraged position – and pro traders can get 50x leverage. And it is against my religion to countenance that in my trading.
Remember, ‘temporary setbacks can become permanent.
With the constant threat of being stopped out using tight stops, I must time my entries almost perfectly. That means I must become an expert in picking tops and bottoms with precise timing in all time scales. That is why I developed my Tramline methods. As just one recent example last week I offered up my mega call in Chinese shares – now up 33% in a week! Miss that entry by a day and you missed it. Here is another:
Update on my EUR/GBP campaign: This is a very popular currency cross I have been monitoring for a very long while – but just watching. I had noticed it was trapped within a well-defined 8-year trading range where there were no long-term trends. Here is the weekly chart I posted to my VIP Traders Club members on 20 September
I noted the very large mom div as the market was edging down towards the lower extremity of the pink zone and stated that if that persisted for much longer, the market was very likely setting up for an imminent massive reversal. I judged the profit opportunity was very high.
A few days later and on Thursday, the market did indeed catch a major bid and roared upwards. This is the position as of Thursday (the surge can hardly be seen it is too fast for the software)
OK so I have a promising trade working – all based on the charts and disregarding the market chatter. As for sentiment, in September the market was highly bullish sterling (MSM headlines proclaimed a target of 1.40 (1.31 now) as everyone believed the BoE would take its time lowering rates.
At the same time, the market viewed the euro far less bullishly with expectations of a rapid cut in EU rates as Germany was heading into a recession and its weak economy needed support. That is why the market pressured the cross lower as sentiment became highly bearish.
But any EU support was unlikely to be on the scale as the recent Chinese rocket! Far from it. As a semi-communist one-party state, China has the ability to fire gigantic financial bazookas with little resistance. In any case, I am sure the public has overwhelmingly welcomed it.
But then on Thursday, the BoE indicated rate cuts ‘could be more aggressive’ (thus contravening the bulls’ belief system) and that hit sterling hard (down 1.5 cents as I write), thus boosting my cross. Incidentally, I had been riding the cable bull higher and took a tidy profit on the reversal.
This was a typical headline on Thursday: ‘Pound on track for steepest slide in nearly two years‘. We are living in a world of frequent about-turns in politics, but this one in finance shows that trend is growing here (see also stock indexes esp China for a historic about-turn!!).
So did I foretell that little piece of bearish sterling news from the BoE? Did I have a crystal ball? In a sense I did because I was well positioned for it and the odds were on my side.
So that is what all traders do – we really try to foretell the future – and suggest the future headlines. And take advantage of that insight. There is little guesswork involved – we are estimating the relative odds of a particular outcome from the price action on the charts and sentiment. When the odds seem heavily on your side, you strike.
Of course, now comes the very hard part- managing this trade. But remember, although I have a very promising start to my campaign, it could turn against me. Thoughts of failure are ever-present.
Net Zero update: I view the push to ‘de-carbonise’ the economy as a classic example of the ‘broken window’ fallacy. Most of it will prove to be classic ‘make-work’ projects. Yes, you can employ workers to push stones up and down mountains in a display of feverish economic activity, but there is no net productive work being done – and the funds used will run out (unless you are a government that has an infinite number of printing presses, that is).
The economist Frederic Bastiat debunked that fallacy that states that if someone chucks a brick through a window, a glazier must be employed to repair it thus adding to GDP with his earnings and the extra boost from making the glass. Thus, if everyone gets the bug to break windows, global GDP will soar.
So why has this idea not caught on? Of course, one problem is that the funds needed to pay the glaziers and glass manufacturers must come from some productive work elsewhere and must be denied from productive projects that could grow GDP and employ well paid workers to grow wealth. Of course, the glaziers are much better off, but the overall economy suffers.
On the broken window fallacy, large wars should be great for the economy – at least for the winning side. Lots of windows get broken! But wars are financed by governments who must raise the funds from hiking taxes or even more borrowing (War Bonds in WW2 is a classic example). And those are almost always associated with a depressed general economy as the bullish economic sentiment plummets in wartime (consumers spend less).
This is the situation with Net Zero. The government hands out mammoth grants and subsidies from productive taxpayers to the Net Zero rent-seeking sector in the name of saving the planet (which doesn’t need saving anyway) – all the while our ‘cheap’ renewable energy bills keep soaring with the UK having the most expensive electricity in the OECD.
It’s a race to see when the public will wake up to this ludicrous situation or will it collapse only when we take a deep economic hit? Watch this space.
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ANNOUNCEMENT
I have now started a new nominal £5,000 account Phoenix 2 for Phoenix Traders Club. It will trade a variety of major markets sometimes different from Phoenix 1. My original Phoenix 1 £5,000 account started in March 2023 is now valued at £23,167.
Take a two week Free Trial to both here. Full membership is only £99 a month after two weeks
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Will interest rates really fall now? The Friday NFP data was a bit of a shocker with hiring suddenly robust, the unemployment rate falling and wages growing. The negative was higher public sector jobs. That went against the recent trend pointing to a weakening economy. Hmm. Although one swallow does not make an autumn, I believe it is a good indication of where markets want to go – at least in the short and medium term.
Treasuries were hit hard and the US dollar soared out of its downtrend. I have been short EUR/USD for VIP Traders Club and Phoenix 1 and was well set up for Friday’s plunge This was the chart I posted on Thursday morning:
And by Friday’s close it had broken below my lower trendline in wave ‘c’ of B and heading to under wave ‘a’ of B This is how it ended up on Friday’s close
Bingo! The market closed below wave ‘a’ of B and very close to the Fib 62% retrace. It has done about all that is necessary to consider wave ‘c’ of B complete and poised for the start of a major rally phase in wave C. I shall be watching for a mom div early this week. I may well be taking profits on my shorts and reversing to long.
Of course, sentiment against the euro has crumbled recently and now suddenly, everyone loves the dollar.
Stocks were boosted on Friday and that has put a crimp in my Best Guess scenario that called for an imminent decline. I will have more analysis for VIP Traders Club members next week.
And the budding sharp recovery in crude oil continued apace with upside breakout of major downtrend lines on Friday
My Best Guess is that we are in a strong wave 3 up and my next target is the $80 area. And an upside break of my upper wedge line puts the $100 target into closer focus.
The break below the lower wedge line can be considered a ‘false breakout’ and only a dip below my wave 1 high at the $72 level would compel me to amend my stance.
So how do we interpret this sudden reversal in energy? Of course, OPEC+ members and others have always used their ability to control production – and prices. Lately, there has been much talk of the Saudis potentially flooding the spot market to punish those that are straying from their quotas by crashing prices.
I do not consider that a likely outcome and believe prices will continue higher, not only because of the China bazooka stimulus but also the message from Friday’s jobs picture. I remain bullish.
And I have taken the opportunity in the recent dips in BP, Shell and Exxon Mobil to buy for Pro Shares where my uranium shares are performing well following the corrections. Commodities are coming back from their grave!