20DMF

[Pascal]

We gave back in 30 minutes what took the whole day to gain yesterday... and we even sold 100% more than what we gained yesterday.

I feel lucky that I did not buy anything yesterday as I did not see much short covering activity.

Right now, the market is again oversold, with TNA at the bottom of its envelope. If you want to short, let the price come back tyo you.



Pascal

2612126122

[77seas]

Pascal

Yesterday - were there any pointers to any short covering activity? I am following XLY which gained nearly 1% yesterday. The thrust table you posted in today's comment does not cover explicitly XLY. But was this move in XLY not short covering?

Thanks

[Harry]

To help generate some forum conversation I want to ask a question that has been nagging me.

I don't understand the value of these envelopes? As demonstrated in almost every example figure Pascal has kindly posted, prices can touch bottom (top) of envelope and continue further down (up.) As far as I can tell, touching an envelopes do not reveal future price direction. What am I missing?

Does anyone (besides Pascal) use envelopes? Not picking on the analysis, just wondering how you properly interpret it for profit.

Harry

[Pascal]

Pascal

Yesterday - were there any pointers to any short covering activity? I am following XLY which gained nearly 1% yesterday. The thrust table you posted in today's comment does not cover explicitly XLY. But was this move in XLY not short covering?

Thanks

In fact, we do not really know who bought XLY. I was simply referring to my own list of potential short trades that I was following yesterday.

Yesterday afternoon, I noted that many of these stocks were displaying a negative LEV pattern. This was very unusual in a market that was bouncing hard.

This is why I did not buy anything yesterday.

I attach below the EV patterns that I posted yesterday in the stocks selection Forum



Pascal

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[Pascal]

To help generate some forum conversation I want to ask a question that has been nagging me.

I don't understand the value of these envelopes? As demonstrated in almost every example figure Pascal has kindly posted, prices can touch bottom (top) of envelope and continue further down (up.) As far as I can tell, touching an envelopes do not reveal future price direction. What am I missing?

Does anyone (besides Pascal) use envelopes? Not picking on the analysis, just wondering how you properly interpret it for profit.

Harry

Hi Harry.


This is a good question, but this is not the way I use the envelopes.
The envelope is a tool to help me trade a trend continuation. Therefore, I start with the hypothesis that the trend will continue. The envelopes will not help you to find trend reversals. They are useless for that.

Starting with the hypothesis that a downtrend or an uptrend will continue, the envelope helps you find the best settings for that specific trend and that specific stock.

The first setup is to find the envelope size, which is the size that comprises 90% of the daily price bars around an average.

For example, if you take 20D, there will be wider fluctuations around the 20D average and hence the width of the envelope will be larger than if you use 5D. At this point, the envelope just tells you that there is 90% of chances that the price will stay within the envelope. This means for example that if you buy/short in the middle of the envelope and that if the envelope width is for example +/- 5%, by setting your stop above 5%, you only have 10% of chance that the stop will be hit (and you can trail the stop with the envelope.)

But, if your hypothesis is correct that the trend will continue (and this is true in trending markets) then by buying/shorting a reversal to the middle of the envelope, you can easily see that you put the probability of winning a trade on your side.

This is what the envelope is all about. It allows you to get the best of a trend in your own time frame.
The stop level allows you to get out if the trend reverses. So you have a limited/fixed risk and a measured but potentially unlimited gain, with the gain taking its strength from the trend.

So this is a trend following tool that allows you to find the proper trade settings.


Pascal

[Harry]

Dear Pascal,

Thank you kindly for the response. This explanation and the visual provided in today's daily comment helped me understand how one might use the envelopes.

There is nothing better than learning something new - thanks again!

Harry

[77seas]

"The first setup is to find the envelope size, which is the size that comprises 90% of the daily price bars around an average.

For example, if you take 20D, there will be wider fluctuations around the 20D average and hence the width of the envelope will be larger than if you use 5D. At this point, the envelope just tells you that there is 90% of chances that the price will stay within the envelope. This means for example that if you buy/short in the middle of the envelope and that if the envelope width is for example +/- 5%, by setting your stop above 5%, you only have 10% of chance that the stop will be hit (and you can trail the stop with the envelope.)"


Pascal

I think the chance of hitting the stop for a long trade taken at the midpoint of the envelope is only 5%. This is because if the envelope is covering 90%of the prices then 5% of the values are outside the upper channel boundary and another 5% outside the lower boundary. In a long position, for the stop only lower boundary is relevant. Also do you draw the envelopes by trial and error?

Thanks

[Pascal]

"The first setup is to find the envelope size, which is the size that comprises 90% of the daily price bars around an average.

For example, if you take 20D, there will be wider fluctuations around the 20D average and hence the width of the envelope will be larger than if you use 5D. At this point, the envelope just tells you that there is 90% of chances that the price will stay within the envelope. This means for example that if you buy/short in the middle of the envelope and that if the envelope width is for example +/- 5%, by setting your stop above 5%, you only have 10% of chance that the stop will be hit (and you can trail the stop with the envelope.)"


Pascal

I think the chance of hitting the stop for a long trade taken at the midpoint of the envelope is only 5%. This is because if the envelope is covering 90%of the prices then 5% of the values are outside the upper channel boundary and another 5% outside the lower boundary. In a long position, for the stop only lower boundary is relevant. Also do you draw the envelopes by trial and error?

Thanks

Yes, you are entirely correct.
I have a small utility software that automatically downloads data, checks for possible splits and then calculates the envelope depending on a MA setting.

I plan to give this software for free as part of the next E-book.


Pascal