New Short Triggered - September 8, 2011

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IWM had another day at the races yesterday, hitting and closing right around our limit short entry price of 70.81. One can see at once on the cluster chart that the move was facilitated by the lack of floor resistance and actually all IWM could really conquer was the weekly pivot at 70.15.

Now the serious resistance will start in the first cluster which presents impressive potential floor selling pressure from the yearly pivot (71.84) up to QS2 (72.70). HFTs and other trading programs are normally anticipating such heavy resistance and should slow down their buying before distributing quietly in some consolidation. The robot is signaling a solid shorting edge for the next few days and a pullback of -2% (from yesterday’s close) has over 66% probability of happening in the next three days. The total floor selling pressure for the next two days is (27 + 19) = 46 compared to a total floor buying pressure of ( 17 +15) = 32.

The “worst case” stop of 75.09 is adjusted for the high ambient volatility and could only be hit after a massive high volume buying wave breaking out decisively above the first cluster and above the August 31st highs.

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GDX finally briefly broke the volatility stop, hitting yesterday’s buy limit before quickly bouncing back from the weekly pivot (63.80). The MR1 (66.64) and WR1 (66.45) should soon be retested before leading to much more heavy resistance starting at SR2 and QR2 (69.65). A new buy today at a limit of 64.51 looks reasonable in spite of presenting only a neutral edge setting.
Billy

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Billy, I'm stuck on something and perhaps you can help. The 20DMF is currently characterized as neutral, and when neutral, the Robot will look for the best r/r trade, be it short or long. However, in reviewing the action of the 20DMF it appears that buying continues to come into the market, so it's somewhat counterintuitive to me why it should be considered neutral.

Perhaps it's a statistical fact that when the 20DMF gets above the 0 line, odds are that the market is exhausted and will shortly experience a downturn. If not, on what basis then can we be confident that neutrality is the correct posture to take?

[QUOTE=adam ali;16487]Billy, I'm stuck on something and perhaps you can help. The 20DMF is currently characterized as neutral, and when neutral, the Robot will look for the best r/r trade, be it short or go long. However, in reviewing the action of the 20DMF it appears that buying continues to come into the market, so it's somewhat counterintuitive to me why it should be considered neutral.

Perhaps it's a statistical fact that when the 20DMF gets above the 0 line, odds are that the market is exhausted and will shortly experience a downturn. If not, on what basis then can we be confident that neutrality is the correct posture to take?[/QUOTE]

Adam,


Thanks for the question.

The "neutral" position on the 20DMF is set when a cover your short signal has been issued.
This is the definition. Simply back-tests have shown that in such a condition it is better to stay in cash. Nobody is forced to follow it. If you want to be short or long, please feel free.

The IWM Robot is also free to take its own decision and based on its own past statistics calculated on five different indicators, it decided to go short.

But you are right: trading has a lot to do with confidence.
If you are not confident, why don't you stay in cash?


Pascal

For me, confidence is gained by understanding the underlying methodology, the basis on which decisions are made, and the statistical validation. So you're statement that the backtests bear this neutrality out, that's good for me.

Hi Billy/Pascal,

Why we will would have a different stop level when we open a new position today when the short entry is the same as the existing opened position at 70.81?

Cheers,

Ellis

Magagement of an existing position
The 20DMF has been in NEUTRAL mode since the close of 9/6/2011.
The robot's current position is a SHORT that took place on 9/7/2011.
The short entry price was 70.81 and the current stop level is 75.06. Last close: 69.55

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Settings for a new position
These are the trade settings for the trading day that follows the 9/8/2011:
The short entry price is 70.81 and the stop level is 74.65

[QUOTE=mingpan.lam;16511]Hi Billy/Pascal,

Why we will would have a different stop level when we open a new position today when the short entry is the same as the existing opened position at 70.81?

Cheers,

Ellis

Magagement of an existing position
The 20DMF has been in NEUTRAL mode since the close of 9/6/2011.
The robot's current position is a SHORT that took place on 9/7/2011.
The short entry price was 70.81 and the current stop level is 75.06. Last close: 69.55

-------------------------------------------------------------------------------------
Settings for a new position
These are the trade settings for the trading day that follows the 9/8/2011:
The short entry price is 70.81 and the stop level is 74.65[/QUOTE]

It is because the stop level is calculated as a function of volatility, which changes every day.
Higher volatility implies wider stops.


Pascal

[QUOTE=Pascal;16512]It is because the stop level is calculated as a function of volatility, which changes every day.
Higher volatility implies wider stops.


Pascal[/QUOTE]

Ellis,

Each trade receives its own optimized risk management plan, depending on volatility, the initial entry price and the evolution of the trade since entering. You can not compare the trailing stop loss on a short entry at 70.81 of two days ago with the initial stop on a potential secondary entry at 70.81 today:
- volatilty has changed,
- trailing and initial stop rules are diferent,
- one trade is already 2 days old, the other is not entered yet.

We are simply using independently the optimal backtested stop loss rules for each trade. But the robot page only tracks daily the risk management for the initial entry.

Billy