Markets I Trade: December 11, 2018

In my non-registered investment account I am developing my trend following strategy continuously. I don't pretend to have all the answers; I am always exploring and learning and I am sharing that journey with you on this blog.

All I know for sure is that I want every trade to end in three ways: a small loss, a small gain, or a large gain. I predetermine my risk on each trade and aim to make sure that risk is never exceeded.

Due to account size, my brokerage, my location, and my experience, I am somewhat limited in what I can effectively trade at this time given my risk tolerance. I recently have done a lot of self education on options and have begun to use LEAPS options in my strategy.

I try to limit my investing process to the most liquid markets that have the highest potential for bigger price movements. This generally means ETFs, certain leveraged ETFs, the USD/CAD currency pair, and certain emerging market currencies against the Canadian dollar or U.S. dollar.

Thankfully this covers a large portion of the investable market. ETFs track many different markets and also can provide exposure to currency movements (unhedged country ETFs).

With long call options and long put options, I can very effectively access markets with a relatively high degree of leverage and great risk management. I use only LEAPS options—options that expire more than one year from the entry point.

To monitor each instrument I trade, I look at moving averages and volatility measurements. Although there is no holy grail indicator, looking at these tools can help paint a pretty solid picture of where the markets are going.

Moving averages help identify the direction of trends and can help show turning points in direction. Using volatility measures makes it easy to size each position based on pre-determined exit points. High volatility markets translate to smaller positions while low volatility markets allow for larger positions.

In a currency pair trade, I have found that moving average indicators can be quite effective as well. However, in using moving averages alone, the trader doesn't have the same embedded exit points to help determine position sizing.

This makes moving averages most effective for trading my two primary account currencies—the USD/CAD pair. I don't try position size the USD/CAD pair as I am equally happy with my account cash being 100 percent in the Canadian dollar or 100 percent in the U.S. dollar.

I also look at breakouts, although I am not using them to enter or exit positions. Breakouts can be very helpful in confirming trends and seeing points of previous resistance.

Brazil (EWZ)

Given the current market environment, I am holding very few positions at this time.

In today's post I will provide an update on my Brazil trade.

Back in early October, I took an upside position in Brazilian stocks. I talked about that position entry several weeks ago in the November 13 post.

Since my entry point, my Brazilian stock trade has done very well. It has jumped about 15 percent and, barring a massive gap over my stop-loss, this will be a profitable trade that exceeds my initial risk.

EWZ (Weekly Bar)

Source: Yahoo Finance

Since June 2018, where EWZ was technically oversold, and September 2018 where EWZ was in an interim bottom, we saw a quick jump up. However, EWZ seems to have stalled out at the moment and I am looking for new medium-term highs to be made.

That said, I still think EWZ has a decent technical picture. A move over $42 would solidify the upside and could be a decent entry point.

Upside Optimism

  • An interim higher high was made when EWZ jumped over $37.65 in early October.
  • At current levels, EWZ is not technically overbought and is sitting roughly in the middle of the optimism range.
  • Since early October, the price is holding on top of the 40-week SMA.
  • Volume seems to be generally higher on upwards moves, indicating desire to buy and hesitation to sell.

Upside Caution

  • The price has fallen slightly through the shorter term indication—the 10-week SMA.
  • Although it is flattening, the 40-week SMA is still declining at the moment.
  • The price is now effectively in a trading range of $37 to $42 over the past two months.

If EWZ continues to bounce up from its current price of $38.70, the $47 level will be a key point to look at. That is when the prior strong upwards move stalled in January 2018. If EWZ moves past that, it would signal strength in the upside.

Right now, EWZ would have to jump more than 20 percent to hit $47.

EWZ (Daily Bar)

Source: Yahoo Finance

Looking at the daily chart, we can clearly see the trading range that has formed over the past two months. Although it would clearly be nice to see repeated higher highs, even in the daily chart, the $37.50 level has held twice now.

This chart shows an update on my current stop level. My exit on this trade has moved up and is a little over $37. The stop has really tightened up to the price over the past few weeks and is now within 5 percent of the price.

I entered this trade using a liquid 3x leveraged ETF, trading as BRZU. If I had to do this trade again, I would consider using EWZ long-dated options as they are highly liquid and a more efficient use of capital.

Comments & Questions

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5 Replies to “Markets I Trade: December 11, 2018”

  1. I am enjoying this series. Would love to see some overlays and/or indicators on your charts. They would complement your narrative and would give your readers concreate examples to ponder about.

    1. Daren (Editor) says:

      And I thought my simple red stop-loss line and green buy circle were too much! I always laugh when I see a cluttered chart because more lines are a hindrance in my book.
      I think it’s important to recognize that there is no “best” indicator. Also, a trader can use an indicator to justify anything. Further, indicators can be setup to show almost the exact same end result as a other unique indicators. Ie. Moving average crossovers vs. ATR trailing stops vs. Keltner bands vs. Donchian channels.
      I would encourage readers to put up a chart on Yahoo Finance or Stockcharts and try plug in some of the indicators I mention: 10 week SMA, 40 week SMA, RSI, ATR, etc. I like putting on just one or two indicators at a time to keep things clean and simple to understand.
      Find something you yourself are comfortable with based on your own desired trade frequency, drawdown size, and risk per position.

  2. I understand what you mean about the many indicators that can be used and how different indicators could lead you to the same conclusion (or not).

    I am trying to self-educate myself about technical analysis. I find the task overwhelming. When you read a book, a tutorial, or subscribe to a course on the topic; you are presented with every single indicator. For the newby, picking one over the other is really hard.

    That is why I like seeing how individual people think and apply technical analysis. That doesn’t mean I will adopt that trader indicator toolkit. It simply allows to break down the full technical analysis toolkit into something more manageable and I have to say, fun to read. Divide and conquer!

    Plus, sometimes one does not know what to belive. Once I find a trusworthy source then I try to extract as much knowledge as I can.

    You are on the hook Mr Rich Moose, lol.

    1. Daren (Editor) says:

      Haha, thanks Yanniel! Being a trustworthy source is also why I won’t recommend any one indicator for anyone. But here’s some hints on how to approach technicals that works for me.
      1) Get a bigger picture by using weekly bars instead of daily bars.
      2) Focus on opening and closing prices only because that’s typically when volume is heaviest and prices are the most correct.
      3) Moving averages don’t lie.
      4) Volatility indicators are a great tool to size positions because it helps you avoid big positions in volatile markets where large gaps are more common.
      5) Period highs/lows are great to confirm market moves and can also be used to enter positions.
      6) It’s better to move slower than you intend. For example, if you want to trade each position no more than once a month, find a system that historically trades every two months.
      7) Overbought/sold indicators can help you scale out of a big winning position that likely has run away from your stops.
      8) Avoid the overly fancy holy grail oscillators. They are very tough to trade.
      9) Don’t trade with predictive indicators like Fib, candlestick shapes, or Elliot Wave, they are largely nonsense. You would probably do better if you employed basic risk techniques and simply flipped a coin once a week for entries.
      10) Trend lines on their own are very questionable and are often used to justify the strangest opinions.
      11) Backtest systems on Excel. It’s a bit time consuming, especially at first, but very eye opening. Sometimes things that look nice on a chart actually suck when you run the numbers on every trade. On a chart your eye can quickly gravitate to the big wins and almost ignore those losses.

  3. I appreciate the bullet points Daren! Ah, moving on to today’s post.

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