The Wallaby Trade
Short Description
The Wallaby Trade is a method for counter-trend trading stocks, futures, and forex....
Description
Copyrigh © 2010 ob Booker Copy his book and give i o your riends. Prin your own copies and sell hem (really), and keep he moneyor yoursel(really). oll someweed ino he pages and smoke hem, i you wan. I don’ give a crap. I jus wan you o make sure ha i you give away, prin, copy, disribue, sell or do anyhing wih his book, ha you lis me as he auhor because, like, hey, I wroe he damn hing, so I ge he credi. Oher han ha, I would like or as many people as possible o learn abou he Wallaby rade — and perhaps, one day someone will make me a coa made o wallaby leaher. Please send said coa o Rob Booker, 1201 MainSt., Mezzanine Level, Wheeling, WV, 26003.
Oh, yeah, and I’m serious abou he copying and disribuing hing. Jus go nus wih his. Do whaever you wan. Once you read his inormaion, i’s as much yours as i is mine. Here’s where you can download he original publicaion le, soyou can even add o he book, and hen sell i or give i away as your own. www.WallabyTrade.com
P.S. I apologize in advance or all he bad language in his book.
ISBN: 1460957490 ISBN-13: 978-1460957493
Also by Rob Booker
Books: “Advenures o a Currency rader” “e Currency rader’s Handbook” eBooks: “Forex Sraegy 10: Low isk/High eurn Currency rading”
o all he Wallabies who ollow me on witer, his is or you. anks or reading all he crap I’ve been wriing.
Contents Inroducion 1 2 3 4 5 6 7 8
i
Wha he Hell is a Wallaby? Wha Can Tis Wallaby Do? Bearish Divergence Bullish Divergence Bending he Divergence ules Enering a Wallaby rade Wallaby rade Sizing Sop-Losseson he Wallaby
1 21 27 51 65 85 113 125
Pro arges or he Wallaby Appendices
171 195
9
FREE STUFF
Te Wallaby Indicaor is ree and available here:
htp://www.Wallabyrade.com You can ollow Wallaby rades on witer a:
htp://www.witer.com/wallabyrade
INTRODUCTION WHA YOU GE WIH HIS BOOK
I’m going o share every las deail abou my avorie mehod o shor-erm rading. And you can apply his mehod o longer-erm rading, oo. Tis book is lled wih chars, sep by sep insrucions, some sories, and quie a bi o oensive language. I shouldn’ ake you long o read he book, bu I hope you come back o i again and again as you learn o rade he sysem. I’ve had he Wallaby indicaor buil or a number o charing plaorms, and as menioned a ew pages ago, you can have he indicaor or ree. In ac, as you’lllearn in chaper 1, you can even rade he mehod wihou he indicaor. Mos o all, I look orward o hearing rom you. Please conac me on witer (preerred) or Facebook. Tis isn’ your average rading book. Bu aer all, you’re no he average rader. And I wan o hear wha you do wih wha you’ve learned. Le’s dive in. And be warned: I does ge a bi sicky a imes.
WHAT THE HE LL IS A WALLABY?
1
2
THE WALLABY TRADE
A ew years ago, I was in Ausralia doing a seminar. During hese seminars I raded live. I showed hundreds o chars and broke down every sysem I used ino specic seps. I was he mos exhausing work I’ve ever done. I me some o my bes rading riends a hese evens — people I’m sill in ouch wih o his day. I generally invened somehing new o share wih each seminar group. Creaing new sysems was un. I’d have somehing resh and exciing o oer he raders. Tey knew hey were geting he very bes I had o give, as well as he laes inormaion. I had more un. Tey had more un. When we had more un, we made more money. You ge he poin. Well, a his Ausralia seminar I inroduced he Wallaby Indicaor, which I buil in he lobby o he hoel. I can’ remember he name o he hoel chain, bu he beds were crap. I el like you were lying on Syrooam. Neverheless, he view o Darling Harbour rom my room was awesome, and I spen a lo o ime sanding in ron o he window, wondering wha he hell ime i was, and wondering why I coninued o y around he world.1 1. I am no making his up: When I ew on his rip rom San Francisco o Sydney, he gae agen realized ha he name on my passpor did no mach my airline icke. Tis was because some jackhole a he U.S. Passpor ofce could no spell, and because I had been oo lazy o ake he ime o send i in or correcions. Because he gae agen was a litle bi iry, and because I was willing o ac a litle bi gay, I go on he plane, anyway, and he even upgraded me o Firs Class. Fancy!
WHAT THE HE LL IS A WALLABY?
3
Here is a picure I ook rom my hoel window:
FIg. 1-1: Te view rom my room in Sydney, Ausralia.
While siting in he lobby o he Novoel (wow! I remembered he hoel name — see, I haven’ damaged every las brain cell in my skull by ying millions o miles) or a ew days, rying o orce my body ino submission o a 14-hour ime change, i occurred o me ha I’d like o see a bunch o Sochasic Oscillaors on op o one anoher. No, his wasn’ some kind o kinky dream I’d had (or ha, see Chaper 2), bu raher, i was a sincere desire o see wha would happen i I sared overlapping indicaors. Would hese indicaors ge along? Would hey mae? Wha would hey produce?
4
THE WALLABY TRADE
Okay, maybe i did ge a litle bi kinky. I ge ha way abou rading. Anyway, he nex hing you know, I’m saying up lae and waking up early, and I’m uriously yping away on my lapop, programming a new indicaor. I ook sandard indicaors and used hem o do new hings. ime passed wihou me even noicing. I skipped meals — even he yummy breakas poaoes rom he Novoel, which were served up by his really cue Czech girl. Aer a couple o days, he indicaor was complee. I was in Ausralia, so I called i he Wallaby. And now you ask again: Wha he hell is a Wallaby? Well, I’m glad you asked. The Wallaby Is an Indicator Built From the Stochastic Oscillator.
An oscillaor is somehing (duh!) ha o“ scillaes,” or swings back and orh. When you place an oscillaor on your char, you’re atemping o ge a eel or he swinging movemen, back and orh, ha a nancial insrumen makes. A he ime I buil he Wallaby, I’d already been using oscillaors in my everyday rading. You probably have, as well. From he elaive Srengh Index (“SI”) o he
WHAT THE HE LL IS A WALLABY?
5
Commodiy Channel Index (“CCI”) o he Sochasic, here are probably hundreds o oscillaors ou here. And hey are mean o do jus one hing, really: Tey ell you when a nancial insrumen is overbough or oversold. For he purposes o his book, I’ll use he leters “OB” o reer o overbough and “OS” o reer o oversold, and I’ll use hese inerchangeably, jus o shake hings up. By he way, I’ll also use he words sock, currency pair, uures conrac, securiy and nancial insrumen — all o reer o he ypes o hings you can rade wih he Wallaby. A nancial insrumen is said o be overbough when i’s gone up so high ha people/chars/asrologiss hink i’s coming back down again. Mos oscillaors have a se o lines ha will show ha his overbough exiss. Tis is hard o describe wih jus words, so I hough I’d wrie a poem abou i:
ere once was a sock named Ford I never moved, so people go bored I wen overbough And I bough he sock And I can’ rhyme, so he end o his limerick makes no sense. All righ, i’s clear ha he poem idea ailed. You can be sure ha I will ry i again laer on, o see i I can make i any worse.
6
THE WALLABY TRADE
Insead o rying o work wih a poem, le’s jus move onward and show you wha an oscillaor looks like when you plo i on a char. Behold:
FIg. 1-2: Oversold!
And also:
FIg. 1-3: Overbough!
Ta’s he regular Sochasic Oscillaor. Te indicaor will show wo lines, one line ha moves aser han he oher. When he aser line goes above 80, we call ha
WHAT THE HE LL IS A WALLABY?
7
overbough, and when he aser line goes below 20, we call ha oversold. When boh lines go above 80 or below 20, we ge our briches on and ge ready o rade. Te Sochasic Oscillaor was invened in 1492 by Teodore oosevel.2 I’s premised on he belie ha as a nancial insrumen ravels higher, he momenum wih which i ravels will slow down. Imagine or a momen ha you’re running uphill. You are probably able o go aser a he botom o he hill han a he op. I’s he same idea wih an overbough reading on he Sochasic Oscillaor. emember, an oscillaor measures he abiliy o somehing o swing back and orh — and when i swings upward (overbough), i’s going o evenually swing back lower. Bu he Sochasic doesn’ jus measure overbough condiions, righ? I’s also used o predic when a price may have moved down so ar ha i should no be able o ravel any lower. Ta’s a prety wild saemen o make, since exacly predicing price movemen is acually impossible. Anyway, ha’s oversold: Te price o a sock has raveled so ar low ha we hink i’s ready or a swing back upward. As a nancial insrumen ravels lower, i’s evenually 2. Tis is no acually rue. I was invened by George Lane, one o he mos amous echnical analyss o all ime. He goes way back — he sared his career a E.F. Huton (so you know when he alked, people lisened) in 1950.
8
THE WALLABY TRADE
going o ge ired, and he momenum will slow down. Price will move a bi lower. I even migh creae a gian spike downward in one las swan dive. All o his pushes our Sochasic lines below he 20 mark. Ta’s a sign ha a sock has gone oversold, and i’s an early warning sign ha i could be ready o head higher. Here’s he ormula or he oscillaor (H = high, L = low):
I ha ormula seems conusing, you’re no alone. In he 50 years since he Sochasic was invened, no one person has ever gone hrough he rouble o calculae i by hand, or even using a calculaor. I’s no necessary. Te chars do all he hard work or you. All ha ormula means is ha he Sochasic compares he closing price o a nancial insrumen o is recen price range. Your chars will auomaically do all his mah or you, so we don’ need o have a big, long conversaion abou i. As long as you plug in some numbers o sar i o, he chars can do he res. Te numbers you need o plug in are or he number o bars you’re going o look back over in order o ge your high o low range, and hen a number or he moving
WHAT THE HE LL IS A WALLABY?
9
average associaed wih he “%D” par o he ormula. You have complee conrol over hese numbers. You are he maser o he Sochasic. Te Big Cheese. Te one who calls he shos. You ge he idea. Mos people choose 7, 3, 3, or heir setings on he Sochasic. I’s used by 99% o all he people in he world who ever plo his indicaor. Only Kim Jong-il o Norh Korea and ob Booker use dieren setings. o keep hings simple, we’ll sick wih he 7,3,3 setings righ now. Once you se i up on your chars, here’s wha i looks like:
FIg. 1-4: A char wih he Sochasic Oscillaor
10
THE WALLABY TRADE
The Problem
Wha? A problem?! Already? Te problem wih jus ploting he indicaor “as is” comes when you ry o build a complee rading sysem ou o showing he sandard oscillaor. O course you can plo i on your chars and buy when he oscillaor goes below 20, or sell when i goes above 80. Or you can do somehing slighly more srcinal — and do he opposie o wha I jus said — buying when i goes above 80 and selling when i goes below 20. Millions o raders have come and gone and done exacly hose hings. While ha migh be enough or some raders, i’s no enough or me. And I’m guessing you bough his book because i’s no enough or you, eiher. Jus puting some colorul lines on my chars isn’ going o be enough o creae a rading mehod. I don’ wan o look a he same hing, in he same way, as mos oher raders. I’m a counerrend rader by choice, and I’m a couner-rend person in my lie. I I nd ou ha everyone is waching he same movie, I cross i o my lis. I I nd ou ha everyone is ploting he same indicaor in he same way, I look or a way o do i dierenly. Te las hing I wan o do is ollow he majoriy o raders. Especially because he majoriy o raders lose money.
WHAT THE HE LL IS A WALLABY?
11
What I’m Tryin to Say
People all around he world pick up a book and learn somehing and ollow i blindly. God, I’m happy ha’s no he way you’re approaching his book. I wan you o hink criically, alk o me on witer, alk o he Wallaby on Facebook, and generally pick his all apar and pu i back ogeher again. I’m going o guide you hrough ha process, each you how o hink abou he Wallaby and show you los o examples — and hen you’re going o have a sysem ha you can call your own. As or he res o he people in he world ha don’ hink criically abou rading sysems, well, good or hem. I would gladly si a shouing monkey in ron o a compuer and have i rade agains hose people, and I be you he monkey would win. Hell, on some days he monkey would bea me. FIg. 1-5:
“Bobo he rading Monkey” aer a loss.
12
THE WALLABY TRADE
Aer he monkey nished beaing himsel up or making common beginners’ misakes, he’d probably have a banana. And aer he banana, he’d probably hrow some poo around unil he go ired. And aer ha, when he had exhaused all his oher diversions, he monkey would probably ask himsel, “Why don’ I mix his up a bi and show he indicaor in a dieren way?” Ten, o o he bahroom wih our litle primae riend, where he’d wash his hands and come back o he compuer and ge o work.3 Ta’s prety much wha I did, oo. I didn’ ing any poo around, bu I did wash up and ge back o work — and hough abou displaying a common indicaor (he Sochasic) in a unique way. I decided o show he Sochasic overlapping on op o anoher Sochasic, overlapping on op o ye anoher. I sounds crazy. I is, I admi, jus a litle bi insane. I was like a hree-layer Mexican dip, only slighly less spicy. Here’s wha I did: I pu he 1-minue Sochasic 7,3,3, on he char. (cheese layer) I hen pu he 5-minue Sochasic on op o i. (second cheese layer!) I hen pu he 15-minue Sochasic on op o ha. (hird cheese layer!)
WHAT THE HE LL IS A WALLABY?
13
And wha I ended up wih was hree oscillaors, rom hree dieren ime-rame chars, all on he same char. Firs le’s ake a look a wha i looks like when you do ha, and hen I’ll explain why I used he ime-rame chars ha I did.
FIg. 1-6: Te Wallaby
3. I srongly sugges ha any ime you see an indicaor — no mater wha i is, including he one you’re reading abou in his book — ha you immediaely look o change he setings o see i you can look a i rom a dieren perspecive. When you change he setings, you sar o make rading more personal. When you make i more personal, i’s beter. I’s as easy as ha.
14
THE WALLABY TRADE
As you migh have observed, i’s almos impossible o see anyhing useul on ha litle picure. I’s jus a bunch o ligh-colored lines running up and down hrough he middle o he indicaor window. Because hese lines are overlapping, i looks like a hear monior or an earhquake measuring device. I’s hard o ell one line rom he oher. Bu I el like I had he essenial elemens I was looking or. I was happy wih wha I had, a leas or sarers. emember, I didn’ jus wan o see i a currency pair was overbough/oversold on he 1-minue char. I waned more: I waned o know i i could go up so ar, so as, ha i would end up being overbough/oversold on hree ime-rames simulaneously. Sop and hink abou i or a momen: Doesn’ i jus seem more powerul, more excepional, i a securiy goes o an exreme on hree dieren ime rames, raher han jus one? I means ha across he board, somehing has gone wacko. Ta’s worh my atenion. Ta’s somehing I’d be ineresed in rading. So, while he overlapping lines gave me a headache, i was a good kind o headache — he kind you ge when you’re saring o hink o somehing really cool and new. I bears repeaing: I don’ wan o look a he same shi ha 99 ou o 100 raders are looking a. You and I wan o see somehing new and resh and o he map. Mos people would never hink o consider a nancial insrumen
WHAT THE HE LL IS A WALLABY?
15
oversold or overbough only i he condiion exised on hree ime rames simulaneously. Tey don’ hink o his su, bu i’s no because hey’re dumb. I have never been he smares rader in he room. I don’ know any more han anyone else. Bu i’s rue ha i I creae somehing dieren, I’m more likely o sick wih i. I I use he Sochasic Oscillaor o he shel, wih no unique wis, I’m no very likely o dedicae mysel o is applicaion. I’s boring o do he same hing as everyone else (and, as we know, i’s also nancially dangerous). When we look a somehing rom an innovaive angle, i’s special. I means somehing o me. I didn’ inven he Sochasic, bu I applied i dierenly. So wha i you and I aren’ rocke scieniss? You can sill dream big, and you can sill do some impressive hings. And i’s simply easier o do grea hings when you’re doing hem on your own erms. Ta’s why we became raders in he rs place. Tink o people who have made a dierence in he world. Tink big. Seve Jobs. John Lennon and Paul McCarney. Jesus. Te guy who invened ho dogs on a sick or wo-ply oile paper. Tese people ook he ools a heir disposal — su ha prety much anyone had access o — and did somehing special. And I’m sure i was easier o ge up in he morning and do he hard work necessary o achieve greaness when hey were working on somehing ha hadn’ been done beore.
16
THE WALLABY TRADE
I humbly sugges ha he Wallaby can do ha or you. I’s no he Holy Grail. I’s no even he igheous Grail, or he eormed Grail — or even he I-Promise-o-DoBeter Grail. Bu i is dieren. I hink you’ll nd ha i’s un. And wha we enjoy doing, we do beter, because we’re willing o do he work. Rob, There’s Still a Problem
Even hough I’d spen he ime o build he indicaor, and I hough i looked prety cool, here was a problem. We’ve already menioned i: Te problem was ha he indicaor, wih all he crazy, jagged lines all over he place, was jus oo difcul o see clearly. How I Solved the Problem I Just Mentioned
Wih he help o a riend, I decided o average ou he Wallaby lines on he indicaor, so ha we could see wha was going on wih jus one line. Tis one line would represen an average o he oher hree lines. I would represen he beans in our our-layer Mexican indicaor dip. You know, beans provide he gas, and ha’s wha our “average” line would do — i would provide he gas or he enire rading mehod.
WHAT THE HE LL IS A WALLABY?
17
Here’s wha he average line looks like:
FIg. 1-7: Te Wallaby, cleaned up.
Once his black line appeared on he char, i all became simpler. In ac, once I had he average line up on he indicaor, I didn’ need he oher lines a all. So I diched hem. I called ha average line “he Wallaby line,” and now, because i was easy o read and packed hree ime-rames’ worh o inormaion ino one simple line, I was perecly happy. And ready o go o work. Wan o see i?
18
THE WALLABY TRADE
FIg. 1-8: Te Wallaby. I’s he shiz-bombies!
And now you know wha he Wallaby is. And why I buil i. And wha i looks like. Now le’s see wha i can do.4
4. By he way, all he examples o he Wallaby on he chars in his book are aken rom he laes ieraion o he indicaor, buil by my riend ega-San in Japan. You’re seeing he Mearader chars, which I use o plo he currencies and some uures conracs. And yes, he indicaor is ree, and you can ge i on he Web sie a: Wallabyrade.com.
WHAT THE HE LL IS A WALLABY?
You can ge he Wallaby indicaor or a number o charing programs or ee, by visiing WallabyTrade.com. Bu you don’ even need he Wallaby indicaor. I you can’ ge he indicaor on your chars, jus do he ollowing: Add he regular Sochasic Oscillaor se o 30, 10, 10; or he elaive Srengh Index (SI) se o 22, and you’ll be on your way. Alhough hese aren’ perec subsiuions or he Wallaby indicaor, hey will do jus ne. eally.
19
22
THE WALLABY TRADE
Beore I ell you wha he Wallaby can do, I need o be oally up ron abou wha i canno do. I canno: urn back he clock so you can ask Kaherine McDonald o he prom. Speed up he imeline or Te apure (ake me, Jesus!). Make Geddy Lee no sound like a dying cow (sorry, ush ans). Here Are Some Thins the Wallaby Can Do
You don’ have o se up he Wallaby wih he 1-minue, 5-minue and 15-minue chars. Le’s run hrough he dieren setings you can use. Type o Tradin
Wallaby Settins
Timerame Watch
Trade Lenth
Shor-erm
1, 5, 15
15
1 day
Medium-erm
15, 60, 240
1530
3 days
Long-erm
240, 1440, 10080
240
1 week
TABLE 2-1
able 2.1 is mean o help you ge sared seting up your Wallaby. I you’re ineresed in shor-erm rading, hen I’d sugges seting he Wallaby indicaor o show he 1-, 5- and 15-minue Sochasic Oscillaors.
WHAT CAN THIS WALLABY DO?
23
In Figure 2.1 I’ll show you wha my setings box looks like when I se up he Wallaby on my chars using he Mearader charing plaorm — a ree and easy-o-use program. eer o Appendix One or more inormaion abou seting up your chars.1
FIg. 2-1: Wallaby setings in Mearader.
Now, assuming you’ve decided o do shor-erm rading and you’ve go your Wallaby se up wih he righ ime rames, nex you need o know which ime-rame char o wach or he rades. Ta’s he nex column. For example, i I’ve se mysel up or shor-erm rading using he 1-minue, 5-minue, and 15-minue setings, hen 1. Te Wallaby indicaor is available or ree or a variey o charing plaorms. See Appendix One or more inormaion.
24
THE WALLABY TRADE
I keep eiher my 1- or 5-minue char open and in ron o me, in order o wach or and ake he rade. Te las column les you know how long rades ypically say open. Incidenally, his is he average lengh o ime beween rade seups, as well. Tese are all imporan poins o remember, because laer on we’re going o look a los o examples. I wan you o know ha every ime you see ha we’re using a 15-minue char, we’re doing medium-erm rading. We’ve go our Wallaby se o 15, 60, 240, and we can expec ha our rades will be open or a maximum o abou hree days. We’ll ge a rade seup (a mos) every hree days. Also, you’ll noe ha he numbers ge airly large in he longer-erm rading setings. Te number “1440” reers o he number o minues in each day, and 10080 reers o he number o minues in each week. Simply pu, I’m using minues o display a ull day or week.
WHAT CAN THIS WALLABY DO?
25
28
THE WALLABY TRADE
Divergence is easy. And i’s powerul. I’ve been rading or 10 years, and i sill exhilaraes me. o sar us o, I’ll share a un ip book-syle drawing. In he upper-righ corner o his book, on he nex 100 pages, you’ll see an experly drawn litle man. He looks like his:
Flip hrough he pages righ now, paying atenion o he animaion. Super high-ech, righ? I am probably he rs auhor o embed video o a regular, old-school book. I you hough video on he World Wide Web was huge, wai unil you see how his akes o! ... All righ, maybe no. As you ip hrough he pages, you’ll see he litle man ossing he ball up ino he air. Somehing special happens when he ball rises o he op o he arc. Do you noice i? I’m sure you did: Even hough he ball has gone higher, is speed has decreased. I’s moving higher bu no as quickly. We’ll call his phenomenon a “lack o momenum.” You know when he ball ges up here a he op — reaching is zenih — ha i’s going o all. As i urns over (also wha I call “rolling over”), i’s going slower now. Graviy
BEARISH DIVERgENCE
29
becomes more powerul han he orce ha propelled i upward. I has run ou o gas. Tese are signs ha he iniial rajecory has encounered an obsacle (in his case, he laws o naure). I you’ve go a small animal or a roten piece o rui nearby, go ahead and hrow i sraigh up ino he air and ry his ou. Please also clean up aer yoursel. I you are a beting man (or woman, o course), you’d be ha he roten dead animal you launched ino he air was going o drop when i reached he op o is arc. And wihou somehing o cach is all, such as your hand, i would all all he way o he Earh, jus like he ball does in our litle animaion. You’d also wager ha he speed wih which he dead creaure is going o all increases as i drops. Ta’s all easy o undersand, because everyone has seen an objec go up ino he air and hen all back down o he ground ... especially any o you who have seen Alex Smih play quarerback or he San Francisco 49ers. Ta was a joke. Okay, no i wasn’. In he rading world, he same hing happens. Financial insrumens ac jus like he ball. ake, or insance, he EU/USD currency pair. I’s my avorie roten animal. Here’s a char:
30
THE WALLABY TRADE
FIg. 3-1: An upward rend
Above we observe he EU/USD moving higher and higher, in wha mos people call a rend — higher highs, higher lows — ha kind o su. emember, as hey say, he rend is your riend. rade wih he rend. Be he rend. Blah Blah. You know he drill. Bu i he EU/USD he ball (orsame roten animal) rom our example, hen i is isprone o he orces o naure as any rising objec. I will drop. Even a currency pair suspended in ouer space by he orces o he Federal eserve (Quaniaive Easing) or a jobs repor (such as he inamous Non Farm Egg oll epor) evenually succumbs o wha I aecionaely call “Financial Graviy.”1
BEARISH DIVERgENCE
31
Te remaining quesion is: How, pray ell, will we know when EU/USD reaches he criical poin a which i begins o urn? Sure, we know ha i mus evenually relax, all, rerace, correc and so orh. Wha kinds o ools sand ready o broadcas he news ha his rend migh end? I presen o you, Dear eader, a parial lis: Candle paterns (see my riend, Seve Nison, abou ha); Bollinger Bands (see Kahy Lien’s “Litle Book o Currency rading” or a grea chaper on he bands); Moving Average Convergence Divergence, heMomenum Indicaor, he Commodiy Channel Index; “Flow analysis” (whaever he hell ha is – ollow @xow on witer or he Down Low on his business); Sraigh-up economic analysis, such as reading annual repors, nancial saemens, and parsing governmen economic repors;
And, because I know some o you do his — here’s he Psychic Friends Nework (when all else ails, as hey say, consul an asrologer). Each one o he iems lised above is a ool. Each is a common mehod. Tousands o raders use hese (and oher) ools o se up rades. For every one hing I’ve lised above, here exis 100 addiional indicaors or char 1. I you have a currency pair ha says up or our hours or more, call a docor immediaely. Tis is a “Viagra Candle,” and i’s no o be oyed wih (or more han our hours, anyway).
32
THE WALLABY TRADE
doohickeys ha raders buy, ren or worship. Each ool is simply a lens hrough which o look a he markes. Tey are equally useul, or worhless, depending on who you are and wha you wan ou o he marke. eally. Endless debaes rage on abou Te Bes echnique. Meanwhile, he debaors coninue o lose money jus as easily as beore. My personal avorie conribuion o his purposeless debae is he idea o having an acual monkey make sock picks and hen compare i o a porolio run by a proessional. You can already guess who I hink would do beter. Let’s get Back to the Ball/ Rotten Animal Flyin in the Air
All righ, hen. How does he ball relae o he EU/USD char shown previously? How can we see ha a securiy has reached a poin where i slows is rae o change upward? Te Wallaby, o course. Ta’s my preerred mehod, anyway, and I plan on convincing you in he nex 150 pages ha you should enslave yoursel o i or eerniy. Or a leas sar a church in is honor or somehing. Te bes hing abou pledging your undying allegiance o he Wallaby is ha i won’ require you o build pyramids or mercilessly slaugher all he litle Jedi knighs in he emple.2
BEARISH DIVERgENCE
33
FIg. 3-2: OMG
Te Wallaby will require you, o course, o learn how o ideniy bearish divergence. Te bes par: I’s as simple as i is powerul, and over he nex ew pages, I’ll show you how o do i in hree easy seps. So le’s ge his show on he road. How to Identiy Bearish Diverence
Tis will be he easies hing you ever did. Even easier, Men, han learning hose eenage, nocurnal discoveries o sel-graicaion.3 2. Tank you, @huckspin rom witer, or he Jedi Wallaby picure. For anoher “Sar Wars” Wallaby, urn o page 121.6. 3. However, learning o ideniy bearish divergence will no cause blindness or damn you o hell. Tese are reasons you migh consider rading divergence as an alernaive.
34
THE WALLABY TRADE
In he nex ew paragraphs, combined wih a ew images, I will show you how o ideniy bearish divergence. I’m going o ask you o play along and even do he unhinkable ac o drawing inside his book, which, when I was a kid, was grounds or a good spanking. Bu my babysiter was ho, so i was oally worh i. (I ound mysel ripping pages rom books every ime she came over. No really.) Te rs hing we’ll do is show a EU/USD char again, his ime adding jus one more Sochasic Indicaor. Ten a ew words o clariy wha we’re looking a. I promised you hree seps, bu we’ve go o see his damn char rs. And hen I promise we’ll proceed wih he seps.
FIg. 3-3: Char elemens
BEARISH DIVERgENCE
35
I you have any quesions abou wha you see on he above char, hen jus ip o he back o his book o he Appendix One, eniled “Seting Up Your Chars,” and you’ll ge he whole sory. eading he enire secion requires jus ve shor minues o your ime. I’s worh en minues i you’re conused in any way abou wha you see. Or i you wan o know how o obain he Wallaby indicaor or your chars. In Figure 3-3 we see price (he candles – which I use insead o bar or line chars), he Wallaby Indicaor and he regular-avor Sochasic Oscillaor se o 30, 10, 10. ime or he hree seps. Step One
Find wo high poins on he char. I don’ care where you look rs. eally. Sar rom he le or he righ. I jus wan you o ideniy any poins ha you could call “highes” on he char. Ten circle hese poins wih a pencil. Go ahead righ now and do he circling on he EU/USD char above. I you don’ have a pencil, you are welcome o jus circle he area on he char wih your nger. When you’re nished, i probably ough o look somehing like his:
36
THE WALLABY TRADE
FIg. 3-4: Tese poins are high
I will no help you draw beter circles on he high poins i you’re soned or inebriaed. Acually, i you’ve been smoking dope while reading his book, his is wha your char probably looks like now:
BEARISH DIVERgENCE
37
So please pu down he doobie and ge back o work. You’re acually almos nished wih Sep One, bu here’s one more hing we need o do ... we need o: DRW A VEICAL LINE FOM HE HIGH PEAKS DOWN O HE EGULA SOCHASIC LINES. I wroe ha in capial leters o make sure you undersand wha I’m asking you o do. Please ake a momen and use your pencil, and do i righ now. Draw a sraigh line down rom each peak, connecing ha line o he regular Sochasic Oscillaor lines below. Here’s wha i will look like:
FIg. 3-5: Connecing he peaks
38
THE WALLABY TRADE
We jus did his so we can nd ou i each peak was overbough on he Sochasic Oscillaor. In his example above, he answer is yes, hey’re all overbough. How do we know ha? Because he Sochasic Line is above he op line — he 80 line — on he indicaor. Ta’s overbough. And as you’ll remember, ha means ha price has become overexended o he upside and could be ready or a subsanial drop. Perhaps, as we’ve said, he ball is ready o all. Le’s lay ou Sep One in a single senence. Here goes: Wallaby Bearish Diverence Step One:
Going rom le o righ, nd a leas wo separae peaks in price which are also each overbough on he egular Sochasic Oscillaor, se o 30, 10, 10. You’ve jus compleed Sep One. I you’ve read his ar, hen here’s no urning back. You simply have o read Sep wo, because his is where hings ge wild and crazy. I’s ars and cras ime! Step Two
All righ, I lied. I’s no going o ge wild and crazy, bu you’re more han one-hird o he way hrough he seps, so keep going!
BEARISH DIVERgENCE
39
Te nex sep is as simple. ake your special Wallaby Brand Hi-ec Wriing Device® and your Wallaby Brand Measuring Sick Tingy® and place he Measuring Sick (commonly known as a “ruler,” bu I hae ulers, and I hae oyaly o any kind, so I’m no using ha word) and draw a line over he ops o he candles moving upward on he EU/USD char. Please do i on he char above, and please do i righ now.4 When you’re done, i should look like his:
FIg. 3-6: rendline across he high poins.
4. I you didn’ ge a Wallaby Brand Hi-ec Wriing Device® or a Wallaby Brand Measuring Sick Tingy® wih your book — which are available as par o he Wallaby Box Se o Books® — hen you can jus prick your nger wih a needle and use your blood as a pen, and cu ou your ibia bone and use ha as a ruler. Seems compleely reasonable.
40
THE WALLABY TRADE
Hey! You’re a genius. I’m going o call your mom and ell her how well you’ve done. In ac, you jus compleed Sep wo! Bu in order o ensure ha I’ve aken somehing simple and urned ino a complicaed nighmare ha’s impossible o remember, I’ve writen ou a longish descripion o his Second, Very Imporan Sep, and here i is: Wallaby Bearish Diverence Step Two:
Draw a rendline above he candles, rom le o righ, connecing he wo peaks rom Sep One, using he highes candle wicks as saring and ending poins. Ta’s Sep wo, and we’re almos nished. Jus so you know, a he end o he chaper, I’ll re-wrie all hree rules in one place. Also, i you bough he box se o books (rom my Web sie), you’ve go a Wallaby Divergence Special Noecard Chea Shee® wih all he rules, and you’ve probably already posed ha nex o your compuer. Step Three
Nex we need o draw a rendline on he Wallaby Indicaor — and we’re going o do i in such a way so ha we can compare he line we drew on price wih he line we’ve
BEARISH DIVERgENCE
41
drawn on he Wallaby. As you can imagine, we’re going o compare he slopes o he wo lines. o do his, please go back o he previous char or he EU/USD, Figure 3.6, and draw a verical line down, saring a he exac beginning poin o he rendline you drew on he candles, and ending a he red Wallaby Indicaor line. Call his poin “1.” Why are we doing his? o se up he precise posiion where we’ll sar our rendline on he Wallaby. We wan i o begin direcly below he saring poin o he rendline on he price. Nex draw anoher verical line downward, saring a he exac ending poin o he rendline you drew on he candles, and erminae your new verical line a he red Wallaby line. We’ll call his poin “2.” When you’ve compleed your maserpiece o verical lines, he char should look somehing like his:
42
THE WALLABY TRADE
FIg. 3-7: Nice verical lines!
You’re doing grea. Tis isn’ difcul a all, is i? Some o you are jus ying hrough his secion (you know, he A and B sudens rom high school geomery: Wha is he circumerence o he square roo o he quadraic diameer o a hexagonal arhropod? Why, i’s orange, o course!). As noed a momen ago, hese verical lines can presenly serve as our saring and ending poins or a rendline on he Wallaby Indicaor. Your saring poin is he verical line on he le, or poin “1.” Your ending poin is he verical line on he righ — poin “2.” Please ake a momen now, and wih your own blood, draw a line across he op o he red Wallaby Indicaor, rom le o righ. When you’re nished, i should look like his:
BEARISH DIVERgENCE
43
FIg. 3-8: Nice blood sains!
On second hough, le’s no draw he rendline wih your blood; insead, le’s jus use a regular pen like normal people. Here’s wha i should look like:
44
THE WALLABY TRADE
FIg. 3-9: Well done!
You’ve now go a rendline on he Wallaby Indicaor. Le’s summarize Sep Tree and hen you can ie up a ournique and sop he ow o blood rom your wounds creaed by Figure 3-8. Wallaby Bearish Diverence Step Three:
Draw a rendline on he Wallaby Indicaor using he rendline on he price (candles/bars) or saring and ending reerence poins. My avorie par is nex: We’re now ready o bring his all ogeher. I’ll summarize he hree seps or us, and hen give egular Wallaby Bearish Divergence a deniion.
BEARISH DIVERgENCE
45
Wallaby Bearish Diverence Step One:
Going rom le o righ, nd wo separae peaks in price which are also each overbough on he egular Sochasic Oscillaor, se o 30, 10, 10. Wallaby Bearish Diverence Step Two:
Draw a rendline above he candles, rom le o righ, connecing he wo peaks rom Sep One, using he highes candle wicks as saring and ending poins. Wallaby Bearish Diverence Step Three:
Draw a rendline on he Wallaby Indicaor using he rendline on he price (candles/bars) or saring and ending reerence poins. And once we nish hese hree seps, ideniying egular Wallaby Bearish Divergence is easy.
46
THE WALLABY TRADE
REgULAR BEARISH WALLABY DIVERgENCE :
egular bearish divergence exiss when: a) A securiy produces higher highs in price. b) ese highs are also simulaneously overbough on he regular Sochasic Oscillaor se o 30, 10, 10. c) And he Wallaby Indicaor, over he exac same period o ime, produces lower highs.
Ta’s i. Using his as a deniion, do we see bearish divergence on he EU/USD in he chars rom his chaper? Well, or sarers, i would have been a massive wase o your ime o do all his work and hen answer he quesion wih a “no.” So you can probably already guess ha he answer is yes. Bu can you see why he answer is yes? Le me show you one more char and explain visually why he answer is yes:
BEARISH DIVERgENCE
47
FIg. 3-10: Poins 1 and 2 show bearish divergence.
I’s clear rom Figure 3-10 ha we have regular bearish divergence. We call i “regular” because here are oher kinds o divergence (which we’ll cover laer). We call i “bearish” because he occurrence o his phenomenon means ha price is probably soon heading lower (ha’s bearish). We call i “divergence” because wha price is doing is dieren (divergen) rom wha he indicaor is doing. o summarize his again, o make sure ha i’s oally and compleely clear — we have jus compared wha price is doing (going higher) wih wha he Sochasic Oscillaor on hree dieren ime-rame chars is doing (going
48
THE WALLABY TRADE
lower). Te ac ha price is able o jump a bi higher, bu he indicaor can’ keep up — ha ac jus by isel is a sign ha somehing has gone wrong. Te ac ha he Sochasic Oscillaor across hree ime-rame chars ailed o conrm he new highs is imporan. I’s more powerul han i we simply showed one oscillaor by isel and made he comparison. Why is his happening o he EU/USD a his exac poin in ime? Maybe people are less excied abou buying he pair because a major economic announcemen is due or release. Maybe here is sill buying going on, bu i’s going on a a slower rae beore he sar o a holiday weekend. Maybe here are ewer people ou here willing o send he EU/USD higher because he daa coming ou o Europe is now only perceived o be slighly beter han he economic numbers coming ou o he Unied Saes. Maybe some rend-raders are saring o ake heir pros. Whaever he underlying cause, i’s here, righ in ron o us. And i means somehing. I means ha we’re ineresed in nding a way o sell his currency pair. We’re even more ineresed in selling he currency pair because hese peaks on price aren’ jus progressively higher, bu hey’re also overbough on he regular, old Sochasic Oscillaor. Did you orge ha we srcinally ook noice o he overbough saus o he Sochasic in he lower panel o he char? Go back o Sep One and Figure 3-5 i you need a reminder (don’ worry, we won’
BEARISH DIVERgENCE
49
coninue wihou you). O all he raders who look a divergence, 99% do no incorporae his overbough requiremen ino he analysis. Over ime you’ll nd ha i can make a subsanial dierence and lers ou some o he rades you really don’ wan o ake. Nex, we’re going o ake a look a wha our Wallaby superhero is up o.
By now some o you have wondered i here are possibly some dieren places o draw your rendlines on he candles and he Wallaby Indicaor. e answer is yes. In hese chars, you acually could have drawn he rendlines saring a litle bi earlier and ending a litle bi earlier — and I wan you o know ha i would have been perecly ne o do so. We’re no alking abou an exac science here, and here’s pleny o wiggle room. Laer on we’ll look a los more examples ha will show you how exible we can be wih drawing hese lines.
52
THE WALLABY TRADE
Because you’re now an exper in bearish divergence, we can do somehing ineresing in his chaper (insead o aking you hrough a long and boring hisory o how King James commissioned 75 monks o sarve hemselves while ranscribing he ancien Wallaby scrolls ono parchmen, using only Koala blood as ink and heir unrimmed ngernails as pens). And so you ask, wha is ha very ineresing hing ha we’re going o do insead o he long and boring crap? I’m going o show you a Wallaby rade, sar o nish, o sor o whe your appeie or more. Yeah, you heard me. Here’s why I wan o show you one complee rade, righ now: I wan you o nish his book in one siting. I wan you o keep moving orward. And by showing you he good su — an enire rade — I hink you’ll be moivaed o discover he oher really good su ha’s coming laer in he book. Also, i your eyeballs nish reading he book soon, you’re more likely o do somehing wih he inormaion you’ve learned. I you use he inormaion, you’re more likely o learn i beter. Te beter you learn i, he beter you’ll be a rading i. And rading i is, well, he mos un I’ve ever had on he shor-erm chars. And helping you o rade more proably is he enire poin o his book. I’ll shu up now, and we’re going o launch up o he nex level. Here’s a char o a bullish divergence Wallaby seup, rom sar o nish.
BEARISH DIVERgENCE
53
FIg. 4-1: A Wallaby buy rade rom sar o fnish.
Wha’s happening in Figure 4-1? Firs, he EU/USD made lower lows on price — you can see ha along he rendline I drew beneah he candles. Across ha same period o ime, he currency pair was oversold on he regular Sochasic Oscillaor se o 30,10,10. (I’ve poined his ou by enclosing hese areas in boxes a he botom o he char.) Las o all, he Wallaby Sochasic, over his same period o ime, was making higher lows. o sum i up: Te currency pair was sreching lower on price, bu he Wallaby Indicaor jus couldn’ agree o ollow. I waned o go up. Ta’s bullish divergence, Friends, and i was an early warning sign ha he EU/USD could be headed upward nex. And ha’s wha i did — 50 poins worh o
54
THE WALLABY TRADE
movemen wihin he nex couple o hours. As indicaed by he arrows, we bough near he very botom and hen we sold when he currency pair had risen by abou 50 pips. I’ll describe he mehod or enering and exiing he rades in laer chapers. Bu his is wha a rade looks like rom sar o nish. I’s a sandard Wallaby rade when hings go well. Some o you have already seen everyhing you need o see abou bullish divergence or now. I you eel compleely comorable wih he concep, eel ree o skip ahead o he nex chaper. However, I’d recommend ha you sick around. I’s only a ew pages, and I promise i will be worh your ime, as well as eneraining. For he res o he examples in his chaper, I’m going o use he S&P 500 index (cash) or charing examples. Bu don’ orge, everyhing we’re alking abou here is as applicable o socks, currencies, uures, precious meals, bonds and anyhing else you can rade.1 Identiyin Reular Bullish Diverence
Tree seps is all i akes. Wih he oundaion you already have rom he previous char, we can breeze hrough each one o hem. 1. For more inormaion on which nancial insrumens have radiionally worked well wih he Wallaby Indicaor, see Appendix Six in he back o he book.
BEARISH DIVERgENCE
55
Wallaby Bullish Diverence Step One:
Going rom le o righ, nd wo separae valleys in price ha are also each oversold on he egular Sochasic Oscillaor, se o 30,10,10. You’re clearly aware ha all we’ve done is reversed he rs sep rom he previous chaper. We wan o see ha price has been able o make new lows. We also wan o know ha hose lows are oversold, hus indicaing ha he pair is ying ou o conrol in a downward move. I’ve gone ahead and prepared a char or us:
FIg. 4-2: S&P 500 makes lower lows ha are oversold.
56
THE WALLABY TRADE
I’ve drawn arrows on he char in Figure 4-2 so you can see ha low poins #1 and #2 are each oversold on he regular Sochasic Oscillaor. Do you noice ha hese wo valleys o oversold candles are separae and disinc? By ha, I mean ha a poin #1, he index wen oversold and hen jumped up ou o oversold, and hen in poin #2 dipped back down ino oversold erriory? Ta’s imporan o me. For a sandard Wallaby rade, I wan o see wo disinc poins ha are each oversold beore I’m ready o se up a divergence rade (and ha goes or boh bullish and bearish divergence). [FOONOE: For hose o you who are wondering, here are in ac non-sandard Wallaby rades, and in hese cases we don’ require wo separae overbough or oversold ses o candles. We’ll alk abou hese rades in a laer chaper. ENDFOONOE] And onward o Sep wo: Wallaby Bullish Diverence Step Two:
Draw a rendline above he candles, rom le o righ, connecing he wo peaks rom Sep One using he highes candle wicks as a saring and ending poin.
BEARISH DIVERgENCE
57
Ta’s easy enough, righ? I’ve go he char ready, and here i is:
FIg. 4-3: rendline in place!
Simple, righ? You’re jus zooming hrough hese rules. No reason we can’ jus y ino he nex one. Wallaby Bullish Diverence Step Three:
Draw a rendline on he Wallaby Indicaor using he rendline on he candles above or saring and ending reerence poins. I’ve go his char ready, oo. Beore I show i o you, I wan
58
THE WALLABY TRADE
o prepare you or somehing: Tere are los o dieren ways o draw rendlines on hese chars and wha you would draw may look dieren rom wha I draw. Mos o he ime, my chars and your chars are going o look very similar. Bu here are imes when hey don’. Ta’s okay. Te dierences are usually very minimal. Also, please keep in mind ha while I’ve included as many chars as possible in he book, I’ve posed hundreds more chars online so you can see he various ways i’s possible o se up he rades. Here’s he char:
FIg. 4-4: rendline on he Wallaby.
BEARISH DIVERgENCE
59
Can you see ha while he S&P 500 is alling rom poin #1 o poin #2, he Wallaby is rising? Ta’s wha we like o see. Nex ake a closer look a area #2. Jus wihin ha small zone, he price makes wo rapid new lows in succession. Each ime i alls in area #2, i ges jus a bi lower. Bu he Wallaby in ha same period o ime rises — even across a small number o candles. I’m going o pause and acually poin his ou on a char.
FIg. 4-4: A closer look a area #2
So, is he S&P 500 index bullish divergen in Figure 4-4? You be i is! I’s no only bullish divergen across poins
60
THE WALLABY TRADE
#1 and #2, bu i’s also bullish divergen across a smaller number o candles in area #2.2 Le’s do a quick review. REgULAR BULLISH WALLABY DIVERgENCE:
egular bullish divergence exiss when: a) A securiy produces lower lows in price. b) Tese lows are also simulaneously oversold on he regular Sochasic Oscillaor, se o 30,10,10. Te Wallaby Indicaor, over he exac same period o ime, produces higher lows. Figure 4-4 clearly shows his phenomenon across poins #1 and #2. Te index wen lower on price bu ailed o do he same on he Wallaby Indicaor. We love ha! I shows reduced enhusiasm or selling he pair. And ha’s naural, righ? I mean, a some poin he buyers dry up and people sar o hink, “Holy crap! Te S&P has allen a lo oday. I’m going o sar aking pros.” A he same ime hese raders are exiing proable shors (by purchasing he index), oher raders sar o noice ha hey’d like o buy he S&P because i’s “on sale.” As hey buy i, he shorsellers who didn’ already ge ou begin o have heir sops 1. Te only reason I brough his up is because I knew some o you were going o ask, and hen sar o wonder.
BEARISH DIVERgENCE
61
riggered. Ta brings he index up a bi higher as well. O course, his is all a generalizaion o he sory behind he rade, bu you ge he idea. Shors are geting squeezed ou, buyers are coming ino he marke and he index sars o rise. Tis ype o rade seup can oen occur laer in he rading sessions (or even in aer-hours rading on he uures marke), when all he craziness has subsided and binge sellers have passed ou on he sree, drunken wih he swee, inoxicaing aroma o a sock index marinaed in he blood o a housand shor-sellers. You, however, may have sayed on he sidelines or he enire rading session, jus waching his downward move play ou, wondering i you’ll ge he chance o rade a divergence seup. And you do. Paience pays o. Saying ou o he marke and waiing or a seup is one o he mos enjoyable hings a Wallaby rader does. Oen smar raders will ask me i here is a way o capure ha enire move downward and rade wih ha shorerm daily rend — and hen jump in and go he oher way when he Wallaby rade ses up. Te answer is yes, o course; here was mos likely a bearish Wallaby rade previously ha led o all his wild selling. So here’s no reason why you wouldn’ have been able o (occasionally) ride he move down and hen ge yoursel geared up o go he oher way. Some raders are beter a doing ha han ohers. I requires a lo o screen ime.
62
THE WALLABY TRADE
Here is a summary o he rules, all in one place or you: Wallaby Bullish Diverence Step One:
Going rom le o righ, nd wo separae valleys in price ha are also each oversold on he egular Sochasic Oscillaor, se o 30,10,10. Wallaby Bullish Diverence Step Two:
Draw a rendline above he candles, rom le o righ, connecing he wo peaks rom Sep One using he highes candle wicks as a saring and ending poin. Wallaby Bullish Diverence Step Three:
Draw a rendline on he Wallaby Indicaor using he rendline on he candles above or saring and ending reerence poins. And, o review: REgULAR BULLISH WALLABY DIVERgENCE:
egular bullish divergence exiss when: a) A securiy produces lower lows in price. b) Tese lows are also simulaneously oversold on he regular Sochasic Oscillaor, se o 30,10,10.
BEARISH DIVERgENCE
63
And he Wallaby Indicaor, over he exac same period o ime, produces higher lows. When his happens, we’re going o hink abou seting up a buy rade. In he nex chaper, I’m going o show you why women are beter raders han men ... a leas, i I’ve go enough ime o alk abou ha, during he course o a discussion abou bending he Wallaby rules. igh now, you’ve go he basics. You can ideniy regular bearish and regular bullish Wallaby divergence. You’re on he road o aking some really good rades, bu ha’s no everyhing. You haven’ learned how o bend he rules ye. And once you learn how o bend he rules, you open an enire new level o Wallaby rading, wih wice he opporuniies or rading, and some o he very bes, mos proable, mos exciing Wallaby rades.
66
THE WALLABY TRADE
I once los a job because I didn’ realize we were supposed o come o work every day. One uesday I walked in around 10:31 in he morning, bagel and newspaper in hand, wiping he ired, crusy sand ou o my bloodsho eyes, walking pas he cubes o deah, and someone said, “Hey, Booker, where were you yeserday?” Te res o he exchange wen somehing like his:
ME: I didn’ come in yeserday because I needed a day o hink. INCEDULOUS LEMMING: Well, um, ha’s kind o odd. ME: Wha’s odd? I.L.: aking a day o work jus o hink. ME: Well, like, wha would you advise me o do when I need a day o hink deeply abou some hings? is place sies every las molecule o creaiviy in humans. e orescen lighs, he realiy ha we’re all boxed ino a small workspace, he lack o any music or background noise. Have you ever noiced ha you never hear laughing ou loud in he oce? And why is everyhing here ligh brown? I.L.: Um, I don’ know how o respond o ha. Sure, all hose hings are rue abou he oce, bu wha am I going o do abou i? Why no jus wai or he weekend or some o ha downime? Or lunch?
BENDI Ng THE DIV ERgENCE RULES
67
ME: I’s easier or me o hink in Las Vegas. I.L.: Wai a minue — you wen o Las Vegas? ME: Yeah. You should have come. I was a rio. I.L.: I couldn’ do ha! I have o work! ME: Wai. Are you elling me ha everyone here comes in every day? I sill shocks me ha employers expec you o come o work every weekday, even i you know you’re going o be unproducive and have beter hings o do. A day o now and hen o recharge, wach some Neix, give yoursel an exra day in he same underwear — you can call i a day o, bu I’d raher call i a “day on.” I you say ha no coming o work is a day o, wha you’re really saying is ha you’re only really “on” while you’re a work. Ta’s insane and you know i. A ha same job, which lased or a ew monhs, I also wore jeans o work every day, excep Friday, jus o be a jackass abou he dress code. On Fridays I’d wear a ull sui or a blue chion uxedo.1 I also reused o wear underwear.2
1. No acually rue. 2. Acually rue.
68
THE WALLABY TRADE
And once I compleely covered a woman’s cubicle in phoos o Mario Lopez prined o rom he gian priner (wha else would ha hing be used or?). For hese innocen violaions o egular Employee Policy Bible Code, I go my desk moved o he area righ ouside o Human esources, where hey could keep an eye on me. Forunaely, his desk was also in he main rafc line where people raveled in order o ge o he bahroom and he break room. Needless o say, wihin a couple o days, I had an exra-comorable chair, a elevision and a seady sream o guess over in my area all day long. Work wasn’ so bad aer all.3 I jus old you ha sory o inroduce he concep o bending he rules. Bending he rules can be un, and when we’re alking abou he Wallaby rade, i can also be proable. In he nex ew char examples, I wan o show you some ways in which Wallaby divergence doesn’ se up exacly righ, bu i’s sill worh calling divergence or he purpose o geting a rade.
3. Also, or he record, I sayed up lae and worked a nigh when everyone was gone. I pu in more han 10 hours a day, easily, and I worked every single weekend. I missed my high school and law school reunions or work-relaed rips. And, las o all, I loved hose people. I sill miss you all every day. Hi, Carrie, Mark, Will, Heidi, Andrew, odd, Jon, Chris, Mat, Amanda, Lonnie, Genny, Chaz, yan and Ken!
BENDI Ng THE DIV ERgENCE RULES
69
Jus so you know ahead o ime, whenever we see a problemaic Wallaby rade — somehing ha bends or breaks he rules — we’re going o call i Wallaby “Pervergence.” Ta’s because or some reason, he Wallaby seup has been pervered. Somehing is wrong wih i, in oher words. Bu we’re sill going o ake i. One by one, le’s consider he dieren ypes o problems you’ll see wih Wallaby seups.4 Diverence Problem #1: Not Oversold or Overbouht
Someimes he regular Sochasic Oscillaor jus doesn’ go oversold or overbough all he way. And everyhing else abou he divergence seup looks perec. In a siuaion like his, we’re going o bend he rules and give our samp o approval o he seup. In his rs char, he S&P doesn’ quie ge overbough on he righ side o he seup:
4. Tanks, Max. You invened he erm “Pervergence,” and I’ve always been graeul or your creaiviy and humor. Gluen Morgen! (Ta means “have a pasry or breakas” in German.)
70
THE WALLABY TRADE
FIg. 5-1: No overbough a posiion #2. Ta’s okay!
I’ve drawn a box over he area in quesion, so you can see ha neiher o he Sochasic lines goes above 80 a posiion #2. Bu look a wha else we have going or he seup: Te index is clearly making higher highs on price rom poin #1 o poin #2, and i’s making lower highs on he wo poins in ime. Is iWallaby bendingIndicaor he rulesacross o sayhe hissame is Wallaby divergence? Yes! We’re in clear violaion o ule One — which saes: Wallaby Bearish Diverence Step One:
Going rom le o righ, nd wo separae peaks in price ha are also each overbough on he regular Sochasic
BENDI Ng THE DIV ERgENCE RULES
71
Oscillaor, se o 30,10,10. We don’ have wo separae overbough peaks, and so we’re breaking his rule. Or we’re bending i. And I’m here o ell you ha no mater wha else I said previously in his book, I’m going o accep his seup as a ben-rules divergence rade. Ta’s good enough. Le’s look a an example o his rule-bending on a bullish divergence char:
FIg. 5-2: No oversold a posiion #2. Ta’s okay!
In Figure 5-2, he regular Sochasic doesn’ go below 20 a posiion #2. I ges really close o reaching he 20 line
72
THE WALLABY TRADE
bu doesn’ do i. Well, we’re going o bend he rules. Te Wallaby judges have decided ha i’s good enough. Here’s he principle you can ollow when considering wheher o accep a divergence seup when poin #2 isn’ quie overbough or oversold all he way: Perverence, Principle #1
I he regular Sochasic Oscillaor is no oversold or overbough or poin #2, does i a leas ge close? How exreme is he dierence beween he angle o he rendline on price versus he angle o he rendline on he Wallaby Indicaor? Diverence Problem #2: One Sinle Area o OB/OS
Someimes a seup shows you ha a nancial insrumen was able o go overbough or oversold — bu i’s no oversold or overbough across wo poins in ime on he regular Sochasic. Here is wha ha looks like:
BENDI Ng THE DIV ERgENCE RULES
73
FIg. 5-3: One longish area o “oversold-ness.”
Te divergence is obvious — price is going lower, and a he same ime, he Wallaby is going higher, and i’s so clear ha i’s hard o resis geting involved. Te Wallaby has wo separae valleys (and in ac, i’s go hree). A he same ime, he regular Sochasic is jus in he dephs o hell. line jus scraping4 along he like botom. knowOne romsolid he rules in Chaper ha we’d o seeYou wo separae and oversold valleys on he regular Sochasic. Tis char doesn’ have wha he rules seem o require. Bu is i jusiable? Can we call i Pervered Divergence and ake a rade? o me here’s one simple way o properly bend he rules in his case, and i means we need o drop
74
THE WALLABY TRADE
down o a lower ime-rame char. Tink abou i: Over his same srech o ime on he 5-minue char, here will be more candles on he 1-minue char, and across his greaer number o candles, maybe we’ll see wo separae oversold areas. I bears repeaing here: I wan wo separae overbough or oversold areas, or a leas wo separae valleys or peaks on he regular Sochasic. I’d preer no o ake a divergence rade wihou his condiion being me. In order o mee his condiion, hen, we migh need o swich o a shorer ime-rame char so we can see more candles. Here’s he 1-minue char:
FIg. 5-4: Preso! wo areas!
BENDI Ng THE DIV ERgENCE RULES
75
You can see in Figure 5-4 ha our plan worked. Boh poins #1 and #2 are oversold on he regular Sochasic. From his poin on, we can ener he rade and wach he lower ime rame 1-minue char. We’ve swiched he ime rame ha we’re going o look a. For me, his isn’ hal bad. We now ge an earlier enry on he rade, which you’ll learn laer is very imporan o me. For hese reasons, I’d go ahead and say he divergence seup is valid on he 1-minue char. Te only way we were able o consider his rade is because we moved o a lower ime-rame char. You could do his or any ime-rame char, o course — you could have seen a “single area” problem seup on he 1-hour char, and hen moved down o he 15-minue char o see i i looked any beter. For now, le’s jus summarize he principle: Perverence, Principle #2
I all he elemens o divergence appear, bu across only one coninuous area o overbough/oversold candles, i’s appropriae o move o a lower ime-rame char (any lower ime-rame char) o see i he divergence appears across wo separae overbough/oversold areas. Keep in mind ha Pervergence Principle #2 can be used on his lower ime-rame char o “jusiy” he divergence. Our nal Pervergence Principle should cause he mos conroversy (like wearing jeans o work on a non-casual
76
THE WALLABY TRADE
Monday). Beore you read his secion, I’m already going o ell you ha here will be people ou here who say ha his nex secion shows ha we can break every rule we have previously discussed. And i we can break every rule we previously discussed, why do we have rules a all? Why do we have a Wallaby Indicaor a all? I you’re ready or a grea example o Pervergence and my answer o he above quesions, hen you’re ready or he nex secion. Diverence Problem # 3: “Perverence”
W ha i price and he Wallaby aren’ really divergen? Wha i price is a? Wha i he Wallaby is a? I can happen. I price is a bu he Wallaby Sochasic clearly shows divergence, i’s all righ. Bu wha i ha is combined wih all sors o oher Pervergen eaures? Wha hen? We have Massive Pervergence, which rankly, jus sounds gross. Le’s ake a look.
BENDI Ng THE DIV ERgENCE RULES
77
FIg. 5-5: Can you see all he problems on his char?
Figure 5-5 has more problems han a jar o New York salsa in a exas saloon. One by one, le’s discuss he our major problems on his char.
Problem A: Te price is acually a across he candles ha we’re considering. You migh recognize his as a “Double Botom” ormaion. When we go looking or divergence, we wan o see price rising or alling over ime. How can we nd divergence i price is moving aly? I admi, i’s hard o somach. Bu say wih me, and hink abou his: Over
78
THE WALLABY TRADE
he same srech o ime, a leas he Wallaby Indicaor is rising sharply. Ta’s go o coun or somehing. Believe me, you’re going o nd examples o his on he chars, and you’re going o be emped o jusiy a divergence seup. We migh as well cover i, so i you do jusiy i, you a leas know how o rade i.
Problem B: I’ve drawn a rendline sraigh hrough he Wallaby Indicaor. I cu righ hrough i, as i i doesn’ mater a all. Why would I do such a hing? Well, I’m doing i o beter highligh he ac ha over his srech o candles, he Wallaby is making higher lows, and i’s very clear. I jus have o draw on op o a line in order o do i. Jus so you know — i’s perecly accepable o draw your rendlines and cu hrough indicaors or even candles. As long as you nd divergence across price versus he Wallaby, i’s okay ha your rendline passes hrough some candles or some Wallaby lines. You’ll see more examples o his laer on. Problem C: Te regular Sochasic isn’ really oversold on he exac, perec spos. I you look closely, i’s easy o see ha Oil was oversold a ew candles beore he end o he rendline ha we’ve drawn on he candles hemselves. emember, we’d like o line up he oversold poins a exacly he same saring and ending poins as he rendline on he price. Bu we didn’ do ha here. Is ha accepable? Why he hell no? We’re breaking every oher rule, and we’re no even done!
BENDI Ng THE DIV ERgENCE RULES
79
Problem D: Our rendline on he Wallaby doesn’ mach wih he rendline on price! We sared drawing our rendline on he Wallaby Indicaor earlier han where we sared drawing i on he candles. Is his okay? Yeah, i’s ne. Wha we’re showing is sill he same hing: Price is a while he Wallaby is rising. We’re bending he rules here, and we’ve done a on o bending in a very shor period o ime, in jus one char. And ha’s why we call his las example “Pervergence.” I’s pervered divergence — almos compleely wacko o he poin ha mos people would overlook i. Bu i urns ou ha his seup, alhough clearly decien in some areas, produced an early warning sign ha price was going o rise. And ha’s why we’re here in he rs place. I’s jus like work: Tey pay you o ge su done, and hey shouldn’ be so ridiculous abou he workplace rules. Someimes he crazy people (and crazy seups) are jus as good — or beter — han he plain vanilla ones. Here’s a summary o he nal principle: Perverence, Principle #3
“Pervergence” is pervered divergence. I’s when here are muliple weak poins in he divergence seup all a he same ime, cenering on or semming rom he ac ha price is a (or worse, going in he wrong direcion) over he se o candles you’re considering. Consider hese
80
THE WALLABY TRADE
rades as a whole — and pay special atenion o he slope o he Wallaby rendline and he deph o he overbough/ oversold condiion on he char. Fair enough. Someimes he seup looks crappy. Would anyone ake he pervergence rade in Figure 5-5? Would his be accepable a all? Te answer is yes. You’ll nd ha some o he ben-rules Wallaby divergence seups have muliple weak poins all a he same ime, and hey’re sill worh rading. Wha makes i jusiable? How can we say ha Figure 5-5 is a valid rade seup and no desroy everyhing we’ve worked so hard or so ar in he book? Te answer is simple: Tese Pervergence seups are no or everyone. You do no have o ake hem. Tey look crappy, and hey have all sors o deciencies. Tey look like divergence, even hough hey don’ comply wih some o he divergence guidelines. Looking like divergence, as i urns ou, can be good enough. Bu maybe i’s no good enough or you. Principle #3 above saes ha we consider he rade as a whole. We consider all he acors and hen we sep back, and we hink in probabilisic erms. Is his somehing we’ve seen beore in our esing? Are price and he Wallaby doing somehing dieren across one srech o ime? Many raders are uncomorable wih he hough o bending he rules, because once hey bend some o he rules, hey’re araid hey’re going o bend all he rules. Or hey’re araid ha once some rules have been ben, none
BENDI Ng THE DIV ERgENCE RULES
81
o he rules apply in he rs place. And his is all crap. No rading sysem is perec, and every rading sysem has seups ha exis on he edges o he rules. Tese are he rades ha no one wans o alk abou. Are hey valid rades or no? Wha do hey look like, and how do we handle hem? Ta’s wha I am here o do: explain wha happens on he edges o he rules and ell you wha o do when somehing doesn’ look quie righ — bu i doesn’ look so errible ha you’re going o walk away rom he rade. I nd ha hese ben-rules seups — especially Pervergence — appear aer economic news is released. Ta’s when raders go berserk and sar vomiing all over heir keyboards. Wall Sree and reail raders alike consume so much ums/Valium/Viagra during he 15-minues beore and aer he Non Farm Payroll repor ha hey could open heir own pharmacies. When hings ge a bi wild, a nancial insrumen migh no make a new high or low. igh up unil he momen he repor is released, a divergence rade migh be orming. And hen BAM! Te repor is released, and here isn’ any more ime or he divergence rade o se up. We ge wha we ge, and he marke goes racing o ino he disance. I wan you o sar seeing he early signs o divergence so ha beore hese economic repors are released, you can see pieces o he puzzle ting ogeher. Even i you choose no o rade during he ury and madness o a Non Farm Payroll repor, you a leas can see he bigger picure. As my riend, Dirk du oi, once old me, perspecive is everyhing. Seeing
82
THE WALLABY TRADE
he big picure, being able o sand back and ge a view o hings and sor hem ou — ha’s gold. Ta’s where proable raders are made. You migh consider reducing your rade size on a benrules rade by hal, and hen you won’ be risking as much on a rade ha didn’ mee all he condiions or Wallaby divergence. You migh consider passing on he rs ew ben-rules rades you see and jus paper-rading hese seups. Ta way you can ge a eel or wha hey look like, how hey ac dierenly and how you can bes ake advanage o hem. You migh consider, on he oher hand, only aking ben-rules rades. You migh nd ha you become beter a rading hem han even he normal, “perec-looking” seups. Bu wha does i even mean o “ake” a Wallaby rade? urn he page and nd ou.
BENDI Ng THE DIV ERgENCE RULES
83
86
THE WALLABY TRADE
When I go o rading conerences, I hear people arguing all he ime abou wheher he enry or exi or a rade is more imporan. I’ve engaged in such debae as well. Tis is like arguing abou he name o God, or abou wheher or no a peanu buter and jelly sandwich would wear a one- or wo-piece bahing sui. Sheezy-Weezy, people! Some prety heaed conronaions erup when you ge people on his subjec, and a he end o he day, he ruh is ha hey boh mater. I you’re a jackass abou his opic, and you eel like arguing wih me righ now, jus pu his book down or a ew minues and collec yoursel. We’re no going o engage in any useless debaes inside he pages o my book. Now ha we’re on he same page, le’s cover some imporan ground, saring wih he basis or he enry o a Wallaby rade. The Crossover Is the Entry
ake a look a his screen-sho o he regular Sochasic Oscillaor. Te arrow in he image poins o he as line on he oscillaor as i crosses above he slower line:
ENTERINg A WALLABY TRADE
87
FIg. 6-1: Crossover, close up.
Ta’s all you need o know abou enering a Wallaby rade. Here are he rules: Trade Entry or Bullish Diverence
Sumo obses ut tunc candelapropinquus congruo per a bovis crossover of ordinarius Stochastic Oscillator. Oh. I orgo. I’ve go o ranslae his su beore I pass i on o you. I ook ha las quoe sraigh rom he ancien scrolls o Mordor, writen in he Eln ongue and ranscribed wih he inkish saliva o a housand hobbis. Le’s ry ha again, bu in English his ime.
88
THE WALLABY TRADE
Trade Entry or Bullish Diverence
Buy he securiy when he nex candle close coincides wih a bullish (upward) crossover o he regular Sochasic Oscillaor. Trade Entry or Bearish Diverence
Sell he securiy when he nex candle close coincides wih a bearish (downward) crossover o he regular Sochasic Oscillaor. Bullish Wallaby Trade Entry
I we ake a closer look a some examples, you’ll ge a beter idea o how o ideniy his crossover enry. Here’s a char wih a bullish Wallaby divergence seup ready o go:
ENTERINg A WALLABY TRADE
89
FIg. 6-2: Bullish Wallaby Divergence, 1-hour Oil.
In ha char, Oil is moving lower and he Wallaby is rising over he same period o ime. And simulaneously, he regular Sochasic Oscillaor has been oversold (below 20) wo separae imes. Ta ullls every requiremen or a rade seup. Based on his, we believe ha Oil is se o move higher. For righ now, I jus wan you o ocus on he area marked wih he “A” on he candles and on he Wallaby. I’s okay ha Oil gapped upward on he char. I doesn’ make he rade any less appealing. Because we know we wan o buy Oil, we jus need o have a mehod or geting ino he rade. Here are some hings I
90
THE WALLABY TRADE
wan o accomplish when geting ino a rade: I wan o ge in early. I wan o keep my sop-loss close. I wan my pro arge arher away. Do you see why I’d wan o do he hree hings above? I wan o lose he leas amoun o money possible on he rade. I wan o make he mos amoun o money possible. In order o do his, I need a way o ener he rade early. I don’ wan o wai or 17 dieren kinds o conrmaion in order o jusiy he enry. O course, by making an early enry he prioriy, I’m going o have more rades ha sopou a a loss. Bu ha’s he Jazz we’re playing wih his rade: You’ve go o roll wih i. I’m willing o sop-ou muliple imes on a rade — wih small losses — in order o cach a bigger move ha I ride as long as possible. Now ha we’ve go he general seup, le’s ake a closer look a he areas I’ve marked wih he leter “A.”
ENTERINg A WALLABY TRADE
91
FIg. 6-3: Enering he rade a poin A.
Here’s he jig ha’s going down a poin “A”: Oil jumps up (a gap, as we menioned). Te regular Sochasic Oscillaor shows he aser line crossing up above he slower line. When his happens, i’s ime o ener he buy rade. Tis means ha you pull up your rading plaorm, and you ener an order o buy Oil on he spo marke or uures marke, or you buy a call opion, or somehing ha ges you long Oil. igh now we’re no going o worry abou he exac placemen o he sop loss or he pro arge. Jus ake a momen and wrap your mind in he so, warm
92
THE WALLABY TRADE
orilla ha is he Wallaby rade enry. We’ll cover he res o hose subjecs in he nex chapers. Bearish Wallaby Trade Entry
Enering a bearish Wallaby rade is jus as simple as wha did or a bullish rade. Insead o buying, we’re going o be selling. Insead o waiing or a posiive crossover on he regular Sochasic, we’re going o be waiing or a negaive crossover. An example will help make his clear.
FIg. 6-4: Enering he rade a poin A.
ENTERINg A WALLABY TRADE
93
In Figure 6-4, he EU/USD is moving higher on price bu moving lower on he Wallaby. Ta’s bearish divergence, and as you know, ha means we wan o plan a sell rade or he pair. Te sell rade comes a poin A, where he regular Sochasic Oscillaor makes a downward crossover. Te aser line crosses down below he aser line. I’ve drawn a box around his area o make i easier o see. I’ve hen drawn an arrow sraigh upward on he char, o show he area on price where we’d wan o sell he currency pair. Jus o make sure you undersand wha I do a his poin on he char: 1. As he EU/USD alls, he regular Sochasic Oscillaor makes a bearish / negaive crossover. 2. Tis means we sell he EU/USD. Te box around he candles a poin A show a group o candles – and enering he sell rade on eiher o hose candles would be ne. Bu i’s imporan o noe ha here is one candle – one poin in ime when a candle closes – and he Sochasic has made he crossover ha we require. I always wai or he candle close. Tere aren’ any midcandle enries or my Wallaby rades. Once he candle closes, and he crossover has happened, we can sell he currency pair. I don’ ypically wai or a beter price or delay my enry. Once all he condiions or a rade are me, I make he rade.
94
THE WALLABY TRADE
Does this require you to watch the charts?
For hose o you wondering i you need o be siting a he compuer in order o ake he rade, he answer is yes – i you are a shor-erm rader. For his example (and many o he examples in his book), we are shor-erm rading, so yes, you need o be in ron o he compuer, which is wha many shor-erm raders do. I you don’ like waching he chars or siting a he compuer, hen you could have someone program an auomaed enry or you. Bu here’s anoher answer. You could also simply move your Wallaby rading o he longer-erm chars and ake ewer enries ha ake longer o se up, ha have wider sop losses and much wider pro arges. For now, le’s cover he enry on a Pervered Wallaby rade. Enterin a Perverence Trade
You’ll remember rom he previous chaper ha a Pervered Wallaby rade includes cerain deciencies in he srcinal seup: Te currency pair migh no have made new lows or highs, our rendline may appear ugly as i slices hrough candles or he Wallaby, or he char may no have gone overbough or oversold in wo separae places. Any o hese problems make i a bi more difcul a rs o ideniy he seup isel, as well as he evenual enry on
ENTERINg A WALLABY TRADE
95
he rade. In Figure 6-4, you’ll see he previous example o a Pervergence seup:
FIg. 6-5: Classic Pervergence
As you already probably know, his is Pervered bullish Wallaby divergence. From wha we see on his char, we’ expecing ha Oil is going o move higher. I you’re sill having rouble seeing he seup, you should go back and quickly re-scan he previous chapers. I won’ ake long, and hey’re un o read. Also, make yoursel some cheashee noe cards o help you ideniy divergence. I you bough he special ediion o his book, you received hese ree wih your purchase, and I love you. Follow he
96
THE WALLABY TRADE
Wallaby — i he Wallaby is rising, ha’s your clue ha we’re going o wan o buy he securiy. Now please ocus your atenion on Poin “A” in he char. See how he regular Sochasic Oscillaor crosses upward, jus like we’d like i o — bu i does ha early? Look a where he regular Sochasic alls below 20 and hen rises up above i again. Ta’s where you see he rs crossover going upward, and generally, ha would be our rade enry. Te problem is his: We can’ ener he rade here, because we’ve no even nished seting up he rade a ha poin! emember ha one problem wih Pervergence in his example is ha Oil goes oversold oo early. Ta’s wha causes he crossover (ha would usually be he rade enry) o come early as well. o solve his problem requires paience. We’re going o wai a bi longer or he nex bullish crossover o occur. Here’s he char:
ENTERINg A WALLABY TRADE
97
FIg. 6-6: Crossover #2 comes a poin “B”
I’ve highlighed he area where he subsequen bullish (upward) crossover occurs a poin “B”. And I’ve placed an arrow on he candle ha coincides wih his crossover. Ta’s our enry. I migh help i you look back and orh beween Figure 6-5 and 6-6 a ew hundred imes. I’ve purposeully no hidden he subsequen candles on mos o he chars, so ha you can see wha happens nex. In his case, Oil rises up subsanially. And i you’re wondering i I am only showing you successul rade examples in his book, I wan you o know ha I’m going o show pleny o losing rades in he secion on sop losses. Te Wallaby is no a perec rading sysem. I will
98
THE WALLABY TRADE
lose money. rading always involves a subsanial risk o loss. I works or me, and I’ve had a lo o un (and pros) rading i, bu I do wan you o know ha here are pleny o imes you wan o kick he Wallaby in he eeh and hrow i ou on he sree. I would be grea i i never los, and i i never made you look silly or beting agains he rend, and i i se up 700 proable rades a day, and i i were like Bety Crocker in he kichen and a porn sar in he bedroom. Ten again, I really wouldn’ wan a Wallaby cooking or me. Or, er…orge i. Now ha we’ve goten ha ou o he way, I’d like o show o a ew more examples o he rade enry in rapid-re ashion. We’ll look a boh Pervered and radiional Wallaby enries.
ENTERINg A WALLABY TRADE
99
Example 1
FIg. 6-7: 15-minue Wallaby enry
In Figure 6-7, I’ve atemped o show you a close-up view o wha he candles (A) and he crossover (B) look like, righ a he poin o enry. You’ll see ha here is a group o candles in area (A) and You migh noice in gure 6-7 ha he EU/USD currency pair has allen a bi beore he acual rade enry res o. Ta’s ne. I has pleny o addiional alling o do, and los o pro poenial.
10 0
THE WALLABY TRADE
Example 2
FIg. 6-8: rade enry on Pervered Bullish Divergence
Clearly we’ve go Pervergence on our hands in his example above – he regular Sochasic Oscillaor did no go oversold a wo separae poins. o see his more clearly, jus look a he regular Sochasic a poin B on he char (jus inside he circle I drew). You’ll see ha he Sochasic is no even close o he 20 line (which would mark an oversold condiion). As you already know, his doesn’ mean we’ll compleely avoid he rade. I jus means ha we’re bending he rules a bi. A poin B, we ge a crossover on he regular Sochasic,
ENTERINg A WALLABY TRADE
101
and ha’s our signal o ener he buy rade. I’s no a second crossover – i’s he rs one, and ha’s grea. Ta will do jus ne, hank you. Buy me some Euros, ring he regiser, serve me up some resh, ho orex pippage. o see his crossover enry even more precisely, I’ve given you a close-up view o wha he candle or enry, and he crossover a ha ime, look like. Te char in Figure 6-8 is a 15-minue char, and ha means we’re doing medium-erm rading here. emember ha or medium-erm rading, our Wallaby indicaor is se o 15, 60, and 240, and we’re going o do our rading rom eiher he 15-minue char. By now, you’re really geting he hang o his, so le’s jus do one more example.
10 2
THE WALLABY TRADE
Example 3
FIg. 6-9: Microso, regular Bearish Wallaby Divergen
Some o you have been waiing wih your hands down your pans, jus dying o see a sock char. You may now commence sock-loving, bu please also pay atenion o he ollowing discussion. Noice ha he crossover happens when he regular Sochasic Oscillaor is sill above he 80 line — i’s sill overbough when we ake he rade. Ta’s ne. We don’ care ha i’s sill overbough. We’re no going o wai or he regular Sochasic o all below 80 or anyhing like ha. Many rading sysems would require ha o happen, bu
ENTERINg A WALLABY TRADE
103
we’re no going o. I say, o he gallows wih hose oher rading sysems! And heir MILQUEOAS creaors! We’re going o do whaever we wan o do. Please also keep in mind ha I’m rying o ge early enries. I’d sell my le esicular appendage o ge an early enry on every single rade I ake. Why? Because I learned ha you only acually need one. And: Tis keeps my sop-loss closer. Tis pus my pro arge arher away. You’ll also noice ha Microso gaps down aer he rade enry — i’s a airly subsanial 5% drop in he sock. Ta’s go o be an earnings repor. Or news ha Seve Ballmer was seen a ech conerence, waving around anoher able device hey didn’ acually end up releasing. Or maybe he sock didn’ really gap down, bu he sock exchange servers were running Windows Visa and crashed. In any case, I do wan you o know ha i’s no uncommon or Wallaby divergence o appear righ beore an earnings repor, or beore somehing big is going o happen. Tink o i as he Wallaby giving you a heads up abou wha migh be se o happen wih he undamenals o a sock. I’s no a crysal ball.
10 4
THE WALLABY TRADE
When you hink more abou i, i makes sense ha he Wallaby sends ou is mellow call or divergence righ beore some kind o caaclysmic even. When a sock has reached a criical poin, and i has raveled a grea disance up or down, and raders are way overleveraged, hen hey (and he sock) are mos vulnerable o bad news. Bad news is likely o have he wors eec possible, and margin call raders, and lead o panic. Someimes you can see on a calendar ha an earnings repor is due ou soon. Or ha a major economic number is se o be released shorly. And someimes he news is unexpeced. Bu I hink you’ll nd ha divergence (especially on he longer erm chars) appears beore game-changing evens.
ENTERINg A WALLABY TRADE
105
Example 4
While I’m wriing his, I’m realizing ha i insead o wriing his book, I were reading his book, I’d cerainly appreciae anoher example o wha a Wallaby enry looks like. So, or hose o you who eel he same way, his one’s or you.
FIg. 6-10: Briish Pound/Canadian Dollar Wallaby rade.
I waned o show his example o he GBP/CAD currency pair or wo reasons. Firs, i’s a grea example o he ac ha someimes you have o wai a long ime or one o hese rades o se up. Tis is he 1-hour char, and here
10 6
THE WALLABY TRADE
wasn’ a rade on his pair or more han a week (in ac, i ook even longer, bu he char doesn’ go back ar enough o show i). I you’re rading on he medium-erm chars, you’re going o nd ha waching a ew dieren nancial insrumens will provide you he variey and requency o rades ha you’re looking or. More on ha in a momen. Second, his char shows ha even aer he divergence appears on he 1-hour char, i’s no like we jump ino he rade. Several bullish candles appear on he 1-hour char beore we ge he enry. Waiing can be a bich someimes. Especially or impaien people like me. Some o you don’ wan o wai or he “ofcial” rade enry. Some o you are going o jump righ in on he rade as soon as you see he divergence. You’re going o hink ha you’re doing even more o wha I like: Te earlier he enry, he beter he rade, or somehing like ha. I’m here o ell you ha you go righ ahead, and you do ha. Knock yoursel ou. Seriously. I you ideniy he divergence in is super-early sages, and you wan o ake a rs rade, I’m no going o sand in your way. In ac, le’s go ino bonus-round erriory and alk abou he earlies o early enries ha you could ake on his one. Tese enries are so early you’ll hink we’ve gone back in ime.
ENTERINg A WALLABY TRADE
107
Example 5
Here is he same GBP/CAD char again, wih noes:
FIg. 6-11: An earlier enry.
I’ve ried my bes o ideniy he candle ha represens he earlies possible enry. I’s he righ edge o he divergence seup. By enering a his poin, you’d ge in on he rade 50 poins (pips) earlier. Te rade, le’s say, has he poenial o ne 300 poins o pro wih an enry a he “ofcial” enry poin. Wih an enry a he earlier candle, 50 poins lower, you’re increasing your pro poenial by 16% (50 pips is 16% o 300). Bu ha’s no all. You’re also going o
10 8
THE WALLABY TRADE
have a sop-loss ha’s closer o your enry. And ha means ha you’re risking less o gain more. All good, righ?1 igh. Tere isn’ anyhing wrong wih geting in early. Bu le me explain why I usually wai or he “ofcial” Wallaby enry poin. Firs, he earlies enry comes a a ime when I don’ know ha he divergence is all he way complee. I have no idea i his currency pair is going o all arher. I i does, i could desroy he divergence (by causing a new low in he Wallaby), and i could sop-ou my rade. Ta’s a pain in he but because i i sops-ou my rade and desroys he divergence, I don’ even have a new rade seup. And I will have aken a divergence rade ha didn’ really exis. Second, i’s no really divergence unil he enry. I you hink abou wha I said in he paragraph above, you’ll realize ha we don’ even know i we have divergence (and he seup is no complee) unil we ge ha regular Sochasic crossover on he “ofcial” enry. Ta’s when we know ha he divergence se isel up properly, and he pair is coming up o is lows. By waiing a litle bi longer, he divergence is ully ormed, and we can ener he rade knowing ha we’re no misinerpreing he basic exisence o he rade seup. 1. I didn’ mean o jump ahead by alking abou he pro poenial and he sop loss. Tose subjecs are jus around he corner.
ENTERINg A WALLABY TRADE
10 9
Tird, i you ake he earlies o early enries, you’re going o be aking shos in he dark. Ta migh be ne or he Prince o Darkness, bu no or you and me. You can’ jus re o rades he momen you hink you see divergence seting up. I you do, you’ll nd very quickly ha you ake a lo o rades ha are so early ha you sop-ou more oen. Even i your sop-loss is closer because o he ulraearly enry, you’re going o rack up ons o losses. In he end, rading like ha is more like working in a coal mine han i is rading. You do a lo o work, you ge really diry, you’re dead ired a he end o he day, and you live mos o your lie in he dark. What About Usin a Lower Time-Frame Chart?
Some o you ou here are scraching your heads, and no jus because you haven’ showered in weeks. You’re hinking: I be we can go down o a lower ime-rame char and look or divergence here, and i we nd i, ake an early enry. Ta way, we’d make sure we didn’ ener he rade unil divergence really exised on he char, and we’d ge an early enry wih all he special eaures and benes ha come wih i. Saying wih our GBP/CAD char, we can observe his exac phenomenon. Example 6
11 0
THE WALLABY TRADE
On he 5-minue GBP/CAD char, wih our Wallaby setings a 1, 5, and 15, we observe ha during he same ime he currency pair is seting up a rade on he 1-hour, i’s also seting up a rade on he 5-minue.
FIg. 6-12: An earlier enry on he 5 minue char.
We can ge almos everyhing we wan rom he 5-minue char. And we don’ even have o bend any rules. By now he divergence should be obvious o you, bu I’ll quickly run hrough i. Te currency pair is making lower lows on price — and hose lows also creae wo separae
ENTERINg A WALLABY TRADE
11 1
oversold poins on he regular Sochasic. During he same ime, he Wallaby indicaor is making higher lows. Ta’s bullish Wallaby divergence, and i means ha we hink he pair is going o make a move upward. A poin A, we see a bullish crossover on he regular Sochasic — and ha’s our enry. When he candle closes, he pair is rading a 1.5360. I we had sayed wih he sric rules and enered on he 1-hour char, our enry would have been a 1.5400 (look back a he previous chars i you have any quesions abou ha). By bending he rules on he 1-hour char in Figure 6-11, we hough we migh be able o ener a 1.5350. We go excied because ha was an enry 50 poins early. Now we’re looking a an enry a 1.5360, which is 40 poins early — and we’re doing i in a oally legi, Wallaby manner. By now, you’re probably wondering wo hings: Wha’s our rade size? Where do we se our sop-loss? And i’s ime o jump on hose subjecs.
11 4
THE WALLABY TRADE
Wihou ail, he rs quesion aer I each he enry o a rading mehod is, “Wha should my rade size be?” Bu his is no a book abou money managemen. In he Appendix, you’ll nd a shor lis o books I like on rading, and I direc your atenion here or an expanded discussion o he subjec. Bu i would also be super lame o me o dismiss he opic compleely, so here are my ve rules o money managemen when rading he Wallaby. I don’ believe ha hese rules apply universally o every syle o rading, so don’ sar World War VII on me because you have a dieren se o rules. Calm down. We can all jus ge along. Rule #1: Use a stop-loss when short-term tradin
Se a sop-loss in he rading plaorm and say wih i. Don’ adjus i unless you se i wrongly in he rs place. Don’ widen your sop because you wan o give he rade more room o breahe. I have generally ound ha when you give a rade more room o breahe, i urns around and srangles you. Tere are long-erm raders, or undamenals-based raders, who migh disagree wih his rule. Bu I’m seting ou some rules or rading he Wallaby, no or every kind o rading sysem ha exiss. When you’re rading he Wallaby, jus close ou he losing rades quickly, and I believe your overall experience is going o be very posiive. My riend Jamie Saetele, a rader and brillian echnician,
WALLABY TRADE SIZINg
115
is ond o elling me, “ob, i you ake care o seting and keeping he sop loss, and you le he marke ake care o he pro – you le he marke carry your proable posiions as ar as i can, you’re going o be all righ.” And he’s righ, even hough he’s like 13 years old. Rule #2: Don’t risk more than 1% on a trade
I don’ know wha nancial resources you have. Bu I’m probably sae o assume ha you do no have an unlimied amoun o unds wih which o replenish your rading accoun. So do us all a avor and don’ risk 50% o your accoun on a single rade idea. Ta’s like King Henry VIII beting his enire kingdom on chasing aer some new ail. No advisable. Doesn’ end well. Ten you end up in a awdry Showime cable elevision series. I you are using he Wallaby as a shor-erm rading mehod — a leas he way we’ve discussed i so ar — you’re going o have 10, 20, even 30 or more rading opporuniies each week. Tere is simply no reason o blow your bank on your rs rade o he week. Or any rade o he week. Don’ go Lehman Brohers on me. Jus ake i a bi a a ime. rading success comes rom a series o good decisions over ime. I you’re rading he Wallaby longer-erm, hen you’re ar less likely o have a problem wih overrading or wih beting your enire accoun on a single idea.
11 6
THE WALLABY TRADE
When I say ha you shouldn’ ry o pick he “bes” rade seups and be more on hose – I wan you o know ha I am speaking rom experience. I have spen years clowning around wih rades, rying o call one rade seup “higher qualiy” and worh a larger invesmen. Ta is bullocks. When I do ha sor o hing, I always manage o ge mysel suck in he wors rade ever, and hen I nd mysel a ew days laer having o saw o my arm jus o ge mysel unwedged. And because I’ve risked more on ha one rade, I end o no wan o sop-ou, so I hold he rade open longer. I’s he wors o all possible scenarios. I is a horrible cycle o beting oo big, wishing i would urn around, adding more o a bad decision, and leting a rade go so ar ha I sar o hink ha i jus can’ ge any worse. I always does. And i’s always beter o jus exi as when i has gone wrong. See ule #1 again. Mos people’s single larges losing rade is a gian percenage o heir accoun, meaning, mos people lose a huge amoun o money on heir larges losing rade each week, monh or year. One misake is usually wha kills people. I’s rue o individuals, and i’s rue o hedge unds and invesmen banks and even cenral banks. Mos people don’ lose a iny amoun 1,000 imes and hen nd hemselves wih an empy rading accoun. o he conrary! I we each were only losing a very small percenage o our accoun on a bad rade, we’d evenually be able o urn hings around.
WALLABY TRADE SIZINg
117
o preven any o his rom ever happening, jus do a simple calculaion: 1. Figure ou how much 1% o your rading accoun is. I you have a $10,000 rading accoun, hen ha’s $100. 2. Now decide where you’re puting your sop-loss (or ha, see he nex chaper). 3. Nex, deermine your rade size by making sure ha i your sop-loss is hi, you lose no more han ha 1% o your rading accoun ha you calculaed in #1. For mos o you, his mah is easy, and you’ve been doing i or years. I applies o you wheher you rade opions, socks, uures or orex. Te poin values are dieren, o course. Some o you are rading uures conracs, and some are rading socks, and some are rading currency los. Bu you can do he basic mah necessary o no lose more han 1% o your accoun on a losing rade. And ha one simple decision, o do one simple calculaion, and simply say wih your decision, makes mos o he dierence beween he long-erm winners and losers. Rule #3: Just keep bankin profts.
Each Wallaby rade is a single opporuniy o bank some pro (or suer a small loss). Your goal isn’ o become he world’s mos imporan rader o all ime, or o break he Bank o England. You jus wan o make money.
11 8
THE WALLABY TRADE
Don’ ry o do anyhing ancy wih hese rades. O he winning Wallaby rades, 99% reach some pro arge (discussed laer), and hen you ge ou (or proec your pro and ry or more — see chaper 9), and hen you wai or he nex one. Don’ ry o be a hero wih anyhing. Jus keep proecing and aking pro. I’ve seen ime and ime again ha when raders wan more ou o rades, hey hold ono heir winners bu hey don’ do anyhing o proec he pros. And evenually ha winner becomes a loser. Someimes you have o admi o yoursel ha exiing now wih he pro you have is he bes decision. I you have a winning rade, bank he pro. Or proec ha pro and ry or more. Bu don’ le ha good rade go bad. Don’ le a winner become a loser. I’ll lay ou some sandards or aking and proecing pro in Chaper 9. Rule #4: Set a maximum number o daily trades.
A he beginning o each day, give yoursel a maximum number o rades ha you’re allowed o ake. For a shorerm rader, I’d say hree o ve rades ough o be pleny. And hen when you’ve aken ha many rades, jus sop. urn o he compuer. Walk away. By seting a maximum number o rades ha you can ake, you do he ollowing:
WALLABY TRADE SIZINg
119
1. You wai more paienly or he rade o ully se up. 2. You do a beter job o managing he rade you’re in (which is o say, you don’ ge crazy wih i, because you know you don’ have an unlimied number o rades ha you can ake oday). 3. You don’ overrade. You se a limi o how many rades you can ake, and ha’s he end o he line or you. I have wached people lose heir lie’s savings by siting in ron o a compuer and aking hundreds o rades over a very shor period o ime. I have seen people double down, and hen riple down, and hen quadruple down on rades. And hen ake he same rade ve, six, or seven imes, unil hey’re leveraged o he hil, and he smalles move agains hem buss heir rading accoun. You can’ do his i you have a cerain number o rades ha you can ake each day. I’d raher no sugges ha you pick a se ime o day o rade and only rade during ha ime. Te problem wih ha hinking is ha you migh si in ron o he compuer during a couple o hours in he morning and ge no Wallaby seups, and hen laer in he day miss everyhing. Ta doesn’ make any sense. For orex raders, you can prety much si in ron o he compuer 24 hours a day, i you wan, and ake hese rades. I see no reason why you wouldn’ wan o ake any Wallaby rades ha pop up, any ime o he day, as long as you’re saying wihin your
12 0
THE WALLABY TRADE
maximum rade limi. Rule #5: Set a “Max Loss Per Day” and stick to it.
Se i in your mind ha you have a maximum amoun ha you are willing o risk on a day’s worh o rading. And once you reach ha number — wha I call he Max Loss Per Day (MLPD) — shu i all down and ake a break. When you do his, you accomplish a number o hings: 1. You absoluely preven yoursel rom losing more han your Max Loss Per Day. You know how much you can lose. I migh seem like a small hing, bu i’s no. 2. You preven yoursel rom aking a gian loss in your accoun. 3. You ake he ocus o he “One Grea rade You Canno Miss” and realize ha rading successully is abou aking a series o rades, no jus one grea rade. 4. You preserve your menal sabiliy. People go insane rying o make up or a loss in one day. 5. You realize ha you don’ have o make back he money you’ve los in he same session. You become more realisic, and realism is a rader’s mos producive mindse. 6. You never lose your enire accoun. Your accoun is your uure. You can’ risk losing i. You’ve go o preserve your capial. You already know his, and I undersand I don’ have o bea you over he head wih he
WALLABY TRADE SIZINg
121
same advice a housand imes. When I lose money on a rade, I do become upse. I hae losing money. I hae urning o he compuer when I’ve los money or he day. I bohers me. Bu aer abou 20 minues, I orge abou i and, when my head is cleared, I can look back on he chars and see where I migh have gone wrong. I can replay hings and see how I would have handled i dierenly or he nex ime. Bu when I say in ron o he compuer, I keep making he same misakes. I end o ake earlier and earlier enries, rying o win back wha I’ve los. I end o srech he boundaries o my maximum number o rades or he day, hinking ha i I ake jus one more, I’ll give mysel a chance o ge ou o he hole. All o hese hings evenually lead o my wors rading days ever. Random, Additional Thouhts About Risk
ere are good losers and bad losers. I I ollow he rading rules, and he rade is a loser, I consider i a success raher han a ailure. I is poinless o ge upse abou a loss on a legiimae seup. Ta’s like geting angry ha your poop smells, or arguing abou poliics wih a una sh sandwich. I look a my accoun balance every day.Some people would ell you no o do his, bu I rack daily changes in my accoun balance. Am I gaining huge amouns in a shor
12 2
THE WALLABY TRADE
period o ime? Ta’s a worry (because I probably ook oo much risk, oo large a rade size or oo many rades). Did I lose more han a small amoun or he day? Ta would also be a worry.
I don’ se goals. I never, ever, ever se a goal or rying o make a cerain amoun o money in a dened period o ime. I believe ha when you se goals abou making a cerain amoun o money rading, you are saying ha you wan he marke o provide you wih he opporuniies o rade. You can’ ell he marke o do ha! You can’ ell he marke o do jack. I ells you wha o do. Focus on he now. Insead, I ry o make he bes o every rade ha I’m in, and hen he res akes care o isel. While I can’ se a goal o ge a cerain number o rades every day, or a cerain amoun o pro every day, I can absoluely do my bes no o corkscrew-up he rade I’m in. All ha maters is: 1. 2.
Te rade I’m planning or Te rade I’m in.
I don’ ry o plan or anyhing else.
I es everyhing I do beore I rade.I you wan o do he same, jus go back in ime on he chars and paper-rade he Wallaby. Find a seup and walk hrough i one sep a a ime. Soware is available o make his easier. For
WALLABY TRADE SIZINg
123
example, i you’re a currency rader, you can ge a copy o Forex eser (jus Google i) or abou $100, and i will allow you o go back in ime and es he Wallaby rade. You can replay he 1-minue chars rom anyime in he las 10 years, and place rades, and learn how you wan o handle rades beore you ever use real money. I’ve even had he Wallaby indicaor buil or several dieren charing programs, so he odds are you can se i up, es i ou, all wihou any risk.
I say in ouch wih people abou wha I’m doing.Tere are a leas 20 o 30 people who, a any ime, can see exacly wha I’m rading. Because I manage accouns or invesors, and hey can see every rade I ake when I ake i, I can’ hide anyhing. All o my misakes are ou in he open. I’s amazing how you will rade dierenly i you le your moher see your accoun anyime she wans o. Mos money managemen is common sense. I implore you o keep your losses small and se limis or yoursel. Hell, I implore mysel o do he same. Bu how do we keep our losses small on he Wallaby rade?
12 6
THE WALLABY TRADE
Many a man can save himsel i he admis he’s done wrong and akes his punishmen. - orvald Helmer, “A Doll’s House”
STOP-LOSSE S ON TH E WALLABY
127
I’d love o ell you ha he Wallaby rades work perecly every ime and don’ lose any money. I’d also love o be able o ell you ha hese rades have a specic, dened, cerain winning percenage — bu how in he hell would I be able o do ha or you, across he enire universe o currency pairs, socks and uures conracs? I’s jus impossible o give you a number ha would make sense. Insead, wha I can do is help you learn rom ailed Wallaby rades. I can help you see wha i looks like when i doesn’ work. I can help you avoid some common misakes and place your sop-loss a levels where you’re likely o lose as litle as possible on he rades ha go bad. And yes, some o he rades go bad. Some basic inormation about stoppin out
Mos raders can se a sop-loss on a rade a he same ime hey ake he rade. Tere are wo reasons or seting a sop-loss and puting i ino your plaorm so ha you don’ ge he chance o make a decision abou i laer (o course you can change your mind and aler i laer, bu having i in he rading plaorm rom he sar is a leas a good way o ry o sick wih your loss rules).
12 8
THE WALLABY TRADE
Tose reasons are: 1. A sop-loss is simply an order o exi a rade when i has los a cerain amoun o money. 2. A sop-loss is se o exi he rade when he reason or aking he rade in he rs place is no longer valid. W hen I ake a rade on he EU/USD, a litle box pops up, and I can se he sop-loss a he same ime I’m enering he rade. I looks like his:
FIg. 8-1: Seting up a sop-loss
STOP-LOSSE S ON TH E WALLABY
129
In Figure 8-1, you’ll see I’ve highlighed he area where I choose a sop-loss. I’s measured in poins (called “pips” in currency rading). In his case I’ve seleced o cu he rade o a a loss o 50 pips. Your screen migh look dieren, bu you ge he idea. I he rade loses more han a cerain amoun, hen you ge ou. Te poin o having a sop-loss isn’ jus o preven you rom losing oo much money, alhough ha is admitedly he mos imporan reason or having one in he rs place. Te second reason or having a sop-loss is o simply le you know when a rade idea has become invalid. You sopou when he reason or being in he rade no longer exiss. Can you hink o wha ha reason would be, in he case o a Wallaby rade? We stop-out when the diverence no loner exists
Makes sense, righ? We sop-ou o a Wallaby rade a he momen when he divergence ha creaed he rade in he rs place disappears. Ta’s prety easy o undersand: Why would we wan o be in a divergence rade i he divergence no longer exiss? Say, or example, ha XOM (Exxon Mobil) is showing bearish Wallaby divergence on he 15-minue char.
13 0
THE WALLABY TRADE
FIg. 8-2: XOM. ime o sell.
Te sock has made higher highs on price, bu he Wallaby made lower highs a he same ime. Boh highs are separaely overbough on he regular Sochasic. We’ve go a perec bearish Wallaby seup and we wan o sell he sock. Figure 8-2 shows he poin o enry or he rade a “A”.can’ (I’vesee purposeully erased he candles on he char so you wha happens nex.) Our rs order o business when seting a sop is o deermine he maximum amoun o loss ha we’ll be willing o susain on he rade. I don’ wan you o know wha we migh be hinking abou or a pro arge jus ye because I don’ wan o se a sop-loss based on our
STOP-LOSSE S ON TH E WALLABY
131
pro arge. I hink ha’s insane. aher, we se a sop-loss based on he wo principles we’ve already discussed: he maximum we’re willing o lose, and when he divergence ha sared he enire rade idea no longer exiss. Le’s discuss boh iems one a a ime.
Sop-loss based on money los. Assuming we’re able o sell XOM a approximaely $71 (jus slighly above where I’ve drawn poin A), we migh decide ha we’re going o sopou i we’ve los .75 on he rade (or in oher words, abou 1% o he value o a share a he ime we sold i). Tis is no he only way o calculae a sop-loss, bu le’s jus sar wih his as an example. Sop-loss based on disappearing divergence.A he ime we sell XOM, we don’ know exacly how high he sock has o go beore i invalidaes he bearish divergence. Bu we know ha i such a hing happens — i i makes new highs on price and on he Wallaby — hen we no longer wan o be in he rade. Because we don’ know exacly when ha’s going o happen, we’ll jus wach he sock, and i he divergence disappears beore we lose .75, we’ll close he rade early and ake he loss.
13 2
THE WALLABY TRADE
Here’s an updaed char, showing a dashed line where we’ve se our sop-loss based on a sop-loss se o $71.75.
FIg. 8-3: Tick line a he sop-loss level.
I’m guessing (and his is based on he ac ha I’ve seen housands o Wallaby rades over he years) ha i he price goes o 71.75, hen he bearish divergence is going o disappear, anyway. I jus happens ha way: I price keeps going higher, insead o breaking down — he Wallaby indicaor is bound o ollow. And ha desroys he raionale or he rade. Over ime, you’ll become very skilled a seeing hese hings beore hey happen, especially i you do a lo o esing. You’ll be able o size up a rade and make esimaions abou where he indicaor
STOP-LOSSE S ON TH E WALLABY
133
will be i price rises or alls over a cerain amoun o ime. Here’s wha i looks like on he char.
FIg. 8-4: Our hopes and dreams are desroyed.
In Figure 8-4, he sock rises o $71.75 and hen our broker closes ou he rade a he nex prevailing marke price. We lose 1% (ha’s an approximaion, o course, because we have o accoun or slippage, ransacion ees, ec). Ta’s easy o see. Te price rose up so high ha i hi our exi poin. And we don’ argue abou i or say in longer or pray or a beter oucome. Hope is no a rading sraegy, righ? Bu somehing else is happening a he same ime. No only have we los he maximum amoun allowable on his
13 4
THE WALLABY TRADE
rade, bu he divergence has disappeared. Here’s proo:
FIg. 8-5: Wallaby divergence disappears.
In Figure 8-5, he divergence disappears because he Wallaby sars o make new highs during he same ime ha he candles are making new highs. Ta’s wha you would expec, righ? Everyhing going higher a he same ime. You’ll noice ha he Wallaby’s rise is very sligh — barely percepible. Bu i does sar rising. Ta’s all i akes. Te divergence is over. I’s ough o see your divergence disappear. I know. We invesed ime and energy in his rade, and i sinks o le go. Bu here’s a brigh side: We los a small amoun. We
STOP-LOSSE S ON TH E WALLABY
135
ollowed he rules. Ta’s ha. Can we trade it aain?
Te mos common quesion a his poin is: Can we ge back in? When can we ge revenge on his sock? We had i righ, damn i! We knew ha his sock was due or a decline. When we se up a Wallaby rade, we can become “married” o he idea ha he sock has o all (or rise). Aer dedicaing ime and atenion and eor o he rade plan, we can’ le go o he idea ha he sock should move in jus one paricular direcion. I was elling us somehing — i spoke o us. Over he course o 20 o 30 candles, and maybe an enire day or wo or even a week, we ollowed his seup. One o he mos dangerous habis o culivae is he endency o keep rying o ake he same rade over and over, when i has clearly given us he signal ha i is no longer valid. I’s beter no o argue wih he marke. O course, someimes you sop-ou o he rade, and hen all o he sudden, he blased sock moves 100 poins in he direcion you srcinally waned, and you eel like an idio. You si here wih your humb up your but and sar cursing a he screen. I know I do ha.1
1. Tis reminds me o a saying ha my menor augh me: He who ries o pick marke botom ge sinky nger.
13 6
THE WALLABY TRADE
When you chase aer a seup, here’s wha goes wrong. You ake he nex rade even earlier han he rs, o ry and secure as much pro poenial, o replace he loss ha you jus experienced. Ten you le he rade run agains you longer han your se sop-loss, because you don’ wan o have anoher loser. We end up expressing our anger a he marke by squandering our rading accoun on a goodor-nohing rade seup ha never mean us anyhing bu harm. Geting revenge on he marke is like geting revenge on he weaher: You can’ do i. You are he only one ha ends up hur. Tink abou i. Te marke is sill here aer hundreds o years. We can’ say he same or Bear Searns or Long-erm Capial Managemen, or any oher number o rms and individuals who ough he marke and were desroyed. So, in shor, he answer is, unorunaely, we don’ ake he rade all over again unless he divergence ses up a second ime. I i ses up again a second or hird ime, hen I ake he rade again. Bu i he divergence disappears, I close he char and walk away. I do no ry o jusiy anoher rade. Te marke knows somehing I don’ know. Ta’s enough. I he divergence compleely disappears and does no re-emerge, hen we’re probably looking a a srong rend, and i’s beter o ge ou o he way.
STOP-LOSSE S ON TH E WALLABY
137
Other Ways to Calculate Stop-Losses
Percenage o Accoun In he rs example, we sopped-ou o our XOM rade when we’d los 1% o he value o a share a he ime we sold i. Ta’s jus one way o hink abou i, and i works well when you’re no using any leverage. ypically, I sop ou o a currency rade when I’ve los a cerain percenage o my rading accoun. I I’m rading wih an accoun wih $300,000, hen I wan o exi my rade i I’ve los $3,000. We’ll assume ha we’re working wih his $300,000 accoun in he nex ew examples. Le’s now look a an example o how his works wih my avorie rading insrumen — he EU/USD.
13 8
THE WALLABY TRADE
FIg. 8-6: Te EUR/USD 1-minue char. Enry a “A.”
In Figure 8-6, he currency pair makes higher highs wih price, bu creaes lower highs on he Wallaby. You can see ha we don’ have wo separae overbough peaks on he regular Sochasic, bu ha’s common on he 1-minue chars, and we’re no going o make a big deal abou i. Because his is bearish divergence, we wan o sell he EU/USD. When he regular Sochasic makes a bearish crossover a poin “A,” ha’s he signal o ake he rade. Our rade enry is a approximaely 1.3120. And here’s where we have a quandary. Wha size rade? Where o pu he sop-loss?
STOP-LOSSE S ON TH E WALLABY
13 9
When you’re rading wihou leverage, i’s prety easy o calculae a sop-loss, as we saw in he previous example or XOM. Bu wih currencies — or uures — we’re using leverage, so we have an added componen (rade size) ha we need o consider. We’ve already deermined ha we don’ wan o lose more han $3,000 on he rade, and ha’s our rs concern. Nex we need o deermine a wha poin he divergence seup is no longer valid — and hen we’ll alk abou rade size. In Figure 8-7, we move up o he 15-minue char o ge a bigger-picure view.
FIg. 8-7: Seting a sop a a previous high.
14 0
THE WALLABY TRADE
Te 15-minue char shows a lo more aciviy, over a much larger period o ime, so I’ve drawn a box around our rade seup rom he 1-minue char. I’s only a small area on his longer ime-rame char. Nex I’ve drawn a dashed line across a previous high rom abou 5 hours earlier on he same day. I he pair crosses ha previous high, hen we’re no likely o wan o be in he rade anymore. Why is ha? Previous high poins on a char can ac as resisance, and a nancial insrumen can sruggle o go higher han ha poin i i reurns here, and ha makes i a good place o sar hinking abou a sop-loss. Te same goes or previous lows (see nex example). I he currency pair moves higher han his previous high, hen I’m no longer ineresed in being in he rade. A move higher han ha poin means ha buyers are in conrol, and hey’re pushing he pair beyond an area o resisance. Once ha level is broken, we’re likely o see he pair move even higher sill. And why say in a rade i i’s going agains us? We can jus dump he rade and wai or i o se up again laer. Wha’s more imporan is ha i he pair rises up above ha previous high, hen he divergence ha go us ino he rade in he rs place will mos likely disappear. emember, ha’s he second reason or he sop-loss:
STOP-LOSSE S ON TH E WALLABY
141
When he reason ha we ook he rade is no longer valid, hen we no longer wan o be in he rade. A break above ha previous high should ake care o his requiremen. Tis previous high marked on he char comes a he price 1.3145. Ta’s 25 poins (pips) higher han our enry on he rade. Le’s round ha number o 1.3150 o make he mah easier and move orward. I we place our sop-loss a 1.3150, ha’s a 30-pip sop. I he currency pair rises 30 pips aer we sell, hen we’re ou. We’ve los. And we know ha we don’ wan o lose more han $3,000. I we divide $3,000 by 30, we ge 100. Here’s he calculaion:
Wha his means is ha each poin o movemen in he EU/USD canno equal more han $100. I i did, hen we’d lose more han $3,000 i our 30-poin sop-loss is hi. In currency rading, $100 per poin is a $1 million lo size, so ha’s he rade size we’re going o use. I you’re wondering how in he world we can command a $1 million posiion in he currency marke i we only have a $300,000 rading accoun, here’s your answer: Because we can use leverage in currency rading, we need o pu up margin o
14 2
THE WALLABY TRADE
$25,000 (1/50h o a $1 million posiion) in order o ake he rade. Our broker “lends” us he res necessary o ake he rade. I all his discussion abou rade size bohers you or conuses you, hen jus don’ worry abou i or now. Te Appendix secion on money managemen will poin you o some resources or learning more abou his su. Now we know where we wan o place he sop-loss, we know how many poins agains us he currency pair can go beore we exi, and we know he rade size we’re going o use. We’ve go everyhing we need. I we move o he 5-minue char, we can see enough candles ino he uure o see wha happens wih he rade.
FIg. 8-8: Sopped-ou.
STOP-LOSSE S ON TH E WALLABY
143
I’s no even a close batle here. Te currency pair never cooperaes, and rom he momen we sell i, i rises upward unil we sop-ou. And i orures us or quie some ime, as well. Mos Wallaby divergence rades are over wihin he rs 20 o 30 candles or bars. In his case, i’s a ull 100 candles ha go by beore we are sopped ou. Hey, ha reminds me. I waned o alk o you abou ime-based sops. Time-Based Stops
Mos Wallaby rades are eiher going o be successul in he rs 20 o 30 candles aer he enry, or hey are going o sop ou.
14 4
THE WALLABY TRADE
Here’s an example using he S&P 500.2
FIg. 8-9: Bearish divergence on he 15-minue S&P.
Te index makes higher highs wih price — and each higher high is separaely overbough on he regular Sochasic. A he same ime, he Wallaby is making lower highs. Ta’s bearish Wallaby divergence, and i means ha we are ineresed in selling he index. Our enry is a poin “A,” and I’ve drawn an arrow o help you see his area on he char. I also circled he Sochasic crossover on he lower panel o he char o help you see he area ha “creaed” he enry poin.
STOP-LOSSE S ON TH E WALLABY
145
For a sop, his ime, insead o picking a previous high, we’re simply going o give he index 30 candles o ime. Ta’s 15 minues or each candle, so in oal, we’re going o say in his rade or a maximum o 450 minues (7.5 hours). O course, i he rade his our pro arge rs (see nex chaper), hen we’ll ake our money and run. Bu i we are in he rade or 450 minues and we don’ ge a resul ha we like, we’re closing he rade, win or lose. A poin “B,” he index has gone nowhere. All 30 candles have passed. We’re a prety much he same exac price we were a when we ook he rade. I’m no going o even quoe he price o enry and exi, because i’s jus a dierence o a ew icks. We’ve los hardly anyhing and because we have a ime-based sop, we exi he rade. In his case, i’s a wise choice. Te index jus keeps on rising. I remember his example, in ac, and i came a a ime when he Federal eserve was pumping money ino he economy and every index, commodiy and echnology sock was shooing o he moon. I was a rend oo ough o gh. Te grea hing abou he ime-based sop on his rade is ha we never even made a new high in he index during he ime we were in he rade, so a price-based soploss wouldn’ have been hi. Bu i we had chosen a pricebased sop, we would have suered hrough a bad rade or 24+ hours, only o be rewarded by a loss in he end. In shor, by using a ime-based sop, we saved ourselves some money. And reduced he amoun o aggravaion
14 6
THE WALLABY TRADE
associaed wih saying in a losing rade. And he sory ges even beter. Less han 24 hours aer he rade sopped ou, We go anoher crack a he bearish Wallaby divergence on he S&P. Here’s he char ha shows i:
FIg. 8-10: A second crack a he S&P.
Why do I menion his? Firs, so ha you know ha even in he mids o a gian rend upward, here are very successul bearish Wallaby rades. Second, o show ha sopping ou and losing a small amoun o money is no big deal. Anoher rade comes along, less han a day laer, and brings us some swee proable happiness.
STOP-LOSSE S ON TH E WALLABY
147
More Examples o Stoppin Out
Sopping ou wihou previous high or low Someimes you ake a rade, and you can’ nd a previous high or low o use as a reerence poin or a sop-loss. Tis happens when a rend is so exreme ha a nancial insrumen is making new all-ime highs or lows. Or perhaps our chars don’ go back ar enough o nd a previous high or low. Wha, hen, do we use? Here’s a view o Oil rom December 2010. I’s making new highs or he year, and our chars don’ go back ar enough o nd a previous high reerence poin or a sop-loss.
14 8
THE WALLABY TRADE
FIg. 8-11: Oil, bearish divergen. Enry a “A.”
As Oil makes new highs — which are also overbough on he regular Sochasic oscillaor — he Wallaby makes lower highs. Ta’s bearish divergence. Ergo, we wan o sell he precious liquid. You migh be hinking o yoursel, ‘Why he devil would anyone wan o sell Oil?’ Aer looking a he char, and reading he Wall Sree Journal, you may end up wih a core belie ha Oil is headed o $100 and here isn’ anyhing ha anyone can do abou i. And you migh be righ. Maybe your undamenal oulook is pure genius, and you’ll be awarded he Nobel Prize or Predicing Wha Happens Nex in he Marke. My guess, however, is ha you’re jus like he res o us, and mos o he ime, you don’ know wha he crap is going o
STOP-LOSSE S ON TH E WALLABY
14 9
happen nex. Someimes when I’m he mos convinced o a undamenal oulook on a nancial insrumen — when I would deend my views o he deah — I laer realize ha’s when I am he dumbes. When I am mos subborn, I happen o also be mos wrong. Why do I say all o his? Because I’ve learned ha I’m simply beter o rusing my esing, and jus aking he rade. Does his mean you have o rus every Wallaby rade? No! I means ha you need o rus your own experience and be careul abou rying o ousmar he marke. Someimes (abou once a week) I sruggle o ake he rades I plan because I hink I know somehing hidden behind he char. Usually ha’s when I mess everyhing up. All righ, le’s ge back o he char. In Figure 8-11, he sell enry on he rade comes a poin “A.” because ha’s when he regular Sochasic creaes a bearish crossover. Bu we need a sop-loss. How do we nd i, i we don’ have inormaion abou a previous high, and i we don’ wan o use a ime-based sop? I’s no ha difcul, acually. Jus draw a line across he ops o he recen price acion. Don’ even worry abou going ar back in ime. Here’s ha line:
15 0
THE WALLABY TRADE
FIg. 8-12: A line across he mos recen high.
You don’ have o be a rocke scienis or procologis o see how I drew he line across he recen high on his char. I’s simply he highes poin ha Oil reached during he course o ime ha i se up he divergence. Simple as ha. We drew a line across ha level. And we decide his i Oil rises higher han ha aer we ener he rade ha we’re going o exi.
STOP-LOSSE S ON TH E WALLABY
151
And ha’s wha i does.
FIg. 8-13: Oil erups hrough our sop-loss.
Oil rises by less han $1, and we’re ou. Ta’s convenien, isn’ i? No waiing around, no suering hrough days o movemen. I’s clear and simple. Our sop-loss is super igh, which is he way we like i. emember: We wan o lose he smalles amoun o money possible. When he candle jumps up hrough our recen high poin, he Wallaby is also going o make a new high (or ge very close o doing so), and ha’s going o invalidae our divergence rade, anyway. So he enire reason we ook he rade disappears. No reason o be in.
15 2
THE WALLABY TRADE
You don’ know his righ now — because we’ve no reached he subjec o aking pros — bu his sop-loss is 5 o 6 imes smaller han our poenial pro arge was on he rade. Ta may be he bes par o all. Wih a small loss on each rade, compared o a large pro on he ones ha work, we can survive even prolonged periods o ime when he rades don’ work ou. Two More Examples o Stoppin Out
Gold 15-Minue I’ve no shown enough examples o rading precious meals so ar in he book. Wallaby rades are enormously un o do on hese nancial insrumens, and I oen pos chars on witer and he Wallaby blog abou hese seups. Why no ake a momen and consider wha a losing rade looks like on Gold?
STOP-LOSSE S ON TH E WALLABY
153
FIg. 8-14: Gold makes a new high and sops us ou.
By his poin, he char isel is sel-explanaory. Gold on he 15-minue char makes new highs on price. Boh o hese highs are overbough on he regular Sochasic Oscillaor. A he same ime, he precious meal isn’ able o make new highs on he Wallaby. In ac, he divergence is very clear — he Wallaby is acually alling hard a he same ime Gold is making new highs. Ten we ge an enry on a sell rade. I’s worh noing ha divergence rades end o be more difcul when a nancial insrumen is making new allime highs or lows. Te marke jus sars o reak ou, and i’s hard o nd a sopping place. In he Gold example
15 4
THE WALLABY TRADE
in Figure 8-14, he precious meal was making new allime (inaion-adjused) highs. Tere was alk abou he impending collapse o he U.S. Dollar. Every ime you urned on he elevision, you saw Glenn Beck screaming abou he apocalypse and chewing on a solid bar o gold. Tere was an awul lo o hype a he ime. Would his preven you rom aking a rade? Perhaps. I cerainly is dieren rom rading IBM, or insance, a he same poin in ime, or some oher nancial insrumen ha was no reaching meeoric levels and backed by such ridiculous hype. And or hose o you who believe ha inaion is going o ge ou o conrol, and ha gold is he only hedge agains ha inaion, and ha gold will reach $2,000, or $3,000 … I don’ have any argumens wih you. I’s cerainly possible. I’m sill going o be over here, a my desk wih my swim runks on, waiing or he nex Wallaby rade. I’ll be sopping ou quickly and riding my winners. I migh even buy some gold during ha ime. Okay, back o he example. Once we ener he rade, we see ha Gold alls a bi and hen soon begins o climb. A ime-based sop would no have helped us. Te rade jus sinks. I ricks us a litle bi by going down a rs. I ges our hopes up. Bu ha’s wha Gold does, righ? Successul Wallaby rades are going o give you posiive eedback in he orm o candles moving in he righ
STOP-LOSSE S ON TH E WALLABY
155
direcion (in his case, down), almos rom he very sar. And in his case, we do ge some o ha eedback. In oher words, here isn’ any oher danger sign ha we can ideniy. Te rade looks really good on he char. And ha’s rue o a lo o errible Wallaby rades. Some o he bes-looking seups urn ou o be he wors rades. Oen I’ll nd mysel saying, “Wow, ha looks like a really good rade.” I’ll look a how he rendlines are drawn, and I’ll be really atraced o he ac ha he lines are clean. Tis is a misake nearly every ime. I sar geting involved in he rade rom an emoional perspecive. When i begins o ail, I sar making excuses or i. I’ve allen in love wih i, in oher words. In ha sense, rades aren’ any dieren han women. You sar o overlook relaionshiphreaening auls because she’s go a grea body. When his happens, slap yoursel around a bi and ge your mind righ. Don’ ever become emoionally atached in rading. Save ha or your disasrous personal lie. Speaking o personal relaionships, le’s alk abou IBM.
IBM 15 Minue Char, Boobs, and Bananas Once I had a job or abou 3 monhs. I was he chie marke sraegis a a nancial rm. I was a good job. I loved he people. Bu here was his one girl who would ask her boyriend o ake picures o her a nigh (yes,
15 6
THE WALLABY TRADE
hose kinds o picures), and hen he nex day she would send me an email wih hose phoos atached. Some o you hink ha sounds like he perec on-he-job siuaion. I haed i. I was rying o launch a currency-rading poral Web sie, and she was sending me picures o her boobies. Ugh. Anyway, one day, she sen me a paricularly explici phoo and I decided i was ime o leave or he day beore she sared walking over and hovering around my desk. So I shoved my lapop ino my bag, raced ou o he ofce, and wen o he movies. I hink I saw “Burn Aer eading,” bu I’m no sure. I didn’ ake my lapop ou o my bag or wo more days. During ha ime, he compuer was resing on op o an old banana. In ha dark, cool space, he banana wen so. Over he nex 48 hours, he banana acually go shoved ino he air-ven holes in he lapop. Te nex ime I urned on he compuer, I didn’ noice i because all he smooshy banana was underneah he machine. 20 minues laer, he enire house smelled like Banana Fosers. I was like, “Whoa, wha is ha delighul aroma? Who’s cooking desser?” I menion all o his because ha lapop was an IBM TinkPad, and i ran like a champion, even wih a banana inside. Ta cooked banana sared o burn, and hree weeks laer he enire compuer exploded. And guess wha?
STOP-LOSSE S ON TH E WALLABY
157
I called up IBM in he middle o he nigh and conessed everyhing. Jus wo days laer I had a compleely repaired lapop on my ron porch. Ta’s why I’d like o now spend a ew minues alking abou IBM.
FIg. 8-15: IBM sops-ou o a bearish divergence rade.
I you’re wondering why I’m showing so many examples rom he 15-minue chars, i’s because I love ha imerame. I nd ha many o he successul rades I ake are rom his ime-rame char. Every rader is dieren, o course, and you migh nd ha a dieren ime-rame works beter or you. Bu I like he 15-minue char because he rades don’ se up so requenly ha I have o babysi he compuer or 24 hours a day. And when he rades do re o, I’m in he rades or abou 1 or 2 days.
15 8
THE WALLABY TRADE
Ta seems o be he perec amoun o ime or me. Tis may acually be he bes-looking rade seup in he enire book so ar. Look a how boh he Wallaby indicaor and he regular Sochasic drop violenly, even as he sock is making gradual higher highs. o see wha I’m alking abou, jus look a he dierence in he slope beween he price o IBM and he Wallaby indicaor. o me, ha’s when I sar saying all hose supid hings like, “Tis rade is a no-lose proposiion,” and I go ou and buy a new car or elevision o pre-celebrae my impending success and elecion o he Hall o Fame o Grea rade-Predicors. In realiy, his rade sinks. Because he sock made higher highs wih price — also overbough – bu made lower highs on he Wallaby, we’ve go bearish divergence. And ha, my Friends, means we wan o sell he crap ou o he sock. We wai or an upick, order some shares rom our broker, place he rade, and wai or he swee pros o sar rolling in, Baby. Wrong. Wha a crap rade! A leas i doesn’ lose ha much money, righ? We have a sop-loss jus above he highes poin he sock reached beore he rade enry. On a $127 sock, our sop-loss is a $129, jus wo bucks. Hardly anyhing a all, righ? You can buy a pound o bananas or wo bucks. Jus a sligh
STOP-LOSSE S ON TH E WALLABY
159
movemen agains us, and we give up on he rade. As i urns ou, we are rewarded (as usual) or making a quick exi. Te sock ravels abou $4 higher sill aer we sop-ou. No need o si hrough ha disaser. We’re no rying o ride ou he sorm or prove how ough we are. A rader’s oughness isn’ measured by her abiliy o si in a dumb rade or a long ime. I’s proven by her willingness o accep he loss and keep her composure long enough o ake he nex rade. We’ve seen oo many examples o sopping-ou o sell rades. Le’s oss ou a bonus example and show wha a buy rade looks like when i goes pear-shaped.
GBP/CHF 15 Minue I ge bored saying he same hings over and over again. So, or his example, I’m going o show you a char, and hen I’m going o wrie a shor play. Te play will explain he char. For hose o you wishing o only read he secions o his book writen in radiional, boring mass-marke rading orma, please skip he nex ew pages.
160
THE WALLABY TRADE
Behold, Te Char:
FIg. 8-16: GBP/CHF bullish divergence sop ou.
STOP-LOSSE S ON TH E WALLABY
161
Behold, Te Play, Based Loosely on Henry Ibsen’s “A Doll’s House”: A Dollar’s House
AC I
[SCENE – A well-appoined oce rading area, wih a 30inch monior and comorable work chair. A bushy-musached, handsome young man is inspecing a char, back urned o audience. He is humming a une, clearly in high spiris. A sage lef, a small marsupial wearing a cowboy ha is lounging in a plush recliner, much oo large or his ame, holding a remoe conrol, ipping hrough channels.] OB: Te pair is making lower lows! Bu on he Wallaby, i’s making higher lows!
[Noe o reader: see Figure 8-16]. WALLABY: Yeah. I noiced. I’m divergen. OB: I’m going o buy his currency pair. I can already eel ha once I ake his rade, i’s going o save us rom our nancial problems. WALLABY: I’m no he answer o your nancial problems. Bu since you brough i up, where are you going o buy he currency pair?
162
THE WALLABY TRADE
OB: When he regular Sochasic Oscillaor makes a bullish crossover. Look, here. I’ve drawn an arrow on he char o show where he enry will be. WALLABY: [clearly no paying atenion]. Ta’s nice, Honey. OB: Fine. I can see you don’ care. Bu his is going o be he big-ime. I’m going o se a pro arge or 100 pips. I’m eeling chills go up my spine. WALLABY: urn on he hea. OB: Very unny. You’ll be excied or me, and you’ll show me more love and atenion when you see he rade pros roll in. Such pips you have never seen! WALLABY: You are a hopeless dreamer. A reckless spender. Ta’s all you’ll ever be. AC II
[SCENE – ob sis, pulling on hair while head in hands, back sill urned. Wallaby now sanding beside desk, hands on hips, head cocked o one side. Deep sighs heard om ob.] WALLABY: So, are hese swee pros here ye? OB: No. Nohing ever works or me.
STOP-LOSSE S ON TH E WALLABY
163
WALLABY: You never dance wih me. You were rading when we should have been dancing. Our relaionship is alling apar. Ye you ignore me. OB: I’m a ailure. WALLABY: [hands in pouch]. OB: Te GBP/CHF made resh lows. I exied he rade where I drew his litle circle. I couldn’ say in he rade any longer. I had already los signican pippage. Tere shall be no Chrismas presens in he Booker household. WALLABY: I’m sorry o hear his. OB: Wha shall we do? WALLABY: I’m considering commiting suicide in order o cover up he errible ruh o your ailed rade. OB: [alling on Wallaby’s breas, hand across orehead or eec]. Please, no! AC III
[SCENE – ob and Wallaby si ogeher in recliner, snuggly and lovey o each oher. Wallaby uses paw/hoo/appendage o sroke ob’s hair in caring ashion.]
164
THE WALLABY TRADE
WALLABY: I orgive you. OB: Now I’m orever indebed o you. You have orgiven me and proven ha you are my moral superior. Wih his ac you have made me oally dependen upon you, as a child is o a paren. Or as a doll is o her child owner. Or a quoe currency is o he base currency, or a oreign subsidiary o he muli-naional corporaion, or as George Bush was o Dick Cheney. Our relaionship is premised on anciul and unreasonable noions such as hese. WALLABY: ...Such as he abiliy o a marsupial and a human o mae? OB: No, ha par has always been good. You know ha. WALLABY: How rue ha is. OB: You would never undersand. You’re jus a narcissisic mammal wih no capaciy or empahy. WALLABY: Shhh. I hink “op Che” is coming on. Te secre ingredien is kangaroo. I FIGGIN’ hae kangaroos.
[curain].
STOP-LOSSE S ON TH E WALLABY
165
Frequently Asked Questions About Wallaby Stops
Tere are hree very common and imporan quesions ha I ge abou Wallaby sops. What’s the worst consecutive losing streak on Wallaby trades? My wors losing sreak on he EU/USD was
hree rades in a row. I happened during he period o ime when he U.S. Federal eserve was se o prin one rillion dollars in he program called “Quaniaive Easing.” Jus saying ha almos sounds like a joke. Bu i’s no. Tey really did ha! Tis program o dollar-creaion sen he EU/USD ying ou o conrol. As a noe, he 1-minue char (or any nancial insrumen) is prone o consecuive losses because a quick spike in price can ake ou our sop-loss. Bu because our risk:reward raio is healhy, his generally is no a problem. You migh wonder wha he wors losing sreak will be or index uures, or socks, or bonds, or somehing else ha you’re going o rade. I simply don’ know a rock-solid answer o ha. I don’ rade hose nancial insrumens every day. Bu I have wached every Wallaby rade on he 15- and 5-minue S&P chars or abou a year now, and he maximum number o consecuive losses ha I remember seeing was our. I suspec ha’s rue o jus abou any securiy ha you’re going o rade wih he sysem. What about not using a stop? You’re going o nd ha
166
THE WALLABY TRADE
you can ge lucky every once in a while by saying in a rade and no sopping ou. In he Figure 8-13 or Oil, i almos seems laughable o sop-ou so quickly. Mos raders would say in ha rade or much longer and le he conrac rise $5 or more agains hem beore hey exied. While I’m sure ha occasionally his works ou jus ne, I don’ undersand why we can’ jus ake he loss, hen se up he nex rade. In every insance where I’ve aken he loss, and se up he nex rade, I’ve been happy. Happier, indeed, han when I sayed in he losing rade and ried o “hope i back o break even.” Some traders have decided that instead o stoppingout o a Wallaby trade, they will simply wait or the next setup, and then double down on the entire move.
Tis is called “Maringale” rading, and i’s named aer John Wilkes Booh, who sho Abraham Lincoln. While ha’s no acually rue, I do believe ha saying in he rade and doubling down can be as dangerous as shooing he Presiden o he Unied Saes. Jus like an assassinaion atemp, i a) seems like a good idea a he ime; b) is a way o release your anger; c) i evenually urns ou really crappy. I nd mysel doing his very hing someimes (doubling down — no shooing he Presiden), and every ime, and
STOP-LOSSE S ON TH E WALLABY
167
I’m no making his up, I eel like chopping o my legs while I do his. Every single ime, I kick mysel. “Booker, wha he hell are you doing?” I say o mysel. Invariably, he second atemp a he rade urns ou o be jus as awul as he rs (kind o like going back and daing someone you broke up wih, even when you know she’s no good or you). And hen, wih ha second ugly rade, I’m in a ar worse siuaion and wondering wha o do abou i. I is a ruh abou rading ha:
he greaer he loss, he less likely a rader is o accep i Te larger he loss, he more we wan o avoid i, and he more willing we are o hold on and hope. I call his “Possum rading,” where you simply close your eyes and pray o S. Anhony ha he will nd your los rades. We sar doing crazy su when our rades go wrong. You promise God you’ll sop looking a porn or yelling a your kids or eaing chocolae-covered hamser paws by he caronul a midnigh. Even when God answers hose prayers, you evenually do he same hing all over again, and hen one day, He jus ges really red up and sends your avorie nancial insrumen o he chars, margin calls your accoun, and on op o ha, he’s damned you o hell. I you make a deal wih he devil, you ge a nancial wedgie.
168
THE WALLABY TRADE
And hen your parner makes you sleep on he couch or a year. What about taking the loss on the rst stop, and then doubling up on the next trade? Te marke le you
down. You wan your money back. Mos people hink ha revenge rading is dangerous. I say i’s unavoidable. I he marke akes your money, you should go and knock i in he skull and ge i back. One way o do his is o ea your crow, ake your small loss on he rs rade, and hen, he second ime around, when he rade ses up all over again — slighly increase he rade size and pound on he marke. Tere are some o you shaking your heads righ now in disagreemen. Booker, ha’s no a very responsible hing o do! Oh, I know ha. Like many o he hings I do wih my rading, i’s no very radiional. I’s also no wha you hear rom he average guru-ype. Bu I employ his echnique all he ime when I sop-ou on he rs rade. However, I don’ increase he size aer he hird rade. I jus go back o rading he regular rade size. Armed wih he abiliy o minimize he negaive impac o a ailed rade, you’re now ready o hear everyhing he Wallaby knows abou aking pros. And his is where hings ge exciing.
STOP-LOSSE S ON TH E WALLABY
169
172
THE WALLABY TRADE
Tere’s no elling wha you can do when you allow your mind o accep ha abundance is he naural sae o being. Beore you can make any money rading, I say, you need o rs undersand ha you deserve o be making moneyrading. So many raders begin rading because somehing negaive has happened in heir lives. Tey’ve los a job, run up heir credi cards or nd hemselves in a precarious nancial posiion, and hey need a quick x. Te whole enerprise sars o rom a negaive perspecive: I’m screwed, and I’m an idio or geting ino his siuaion, and now I gota nd a way ou. No surprisingly, when we sar o his way, our rading ends o reec his very perspecive. We sar rading, and hen we ge ourselves ino rouble, and hen we ge mad a ourselves, and hen we desperaely seek a way ou o he rouble. Our cycle o rading ollows he cycle o our lives. Have you ever el yoursel rapped in his patern? I’ve been here. I his cycle doesn’ seem amiliar o you, perhaps you sared rading aer a successul career or experience in some oher arena. You come o rading wih his mindse: I’ve been successul a running a corporaion, so why wouldn’ I be successul a rading? People in his second caegory become really rusraed when pros don’ come quickly. Tey expec success as.
PROFIT TARgETS FOR THE WALLABY
173
And rying o orce pros o come quickly has a errible eec on rading. You sar o orce rades. You sar o increase he rade size (I’m smar; I’m powerul; I know wha I’m doing). Many people in his caegory also eel uncomorable sharing heir resuls openly wih ohers. Tey’ve been successul, and hey don’ see any reason o answer o oher people. I’s hard o ask or help when or years you’ve been in charge. rading is made more difcul when you don’ eel comorable showing your weaknesses. Saring over rom scrach is a humbling experience. Why I Said All o That
From he sar, beore we conclude our discussion o he Wallaby rade wih a bang, I wan o encourage you o shi your perspecive. aher han hink o rading as a way ou o a problem, or o anoher conques, I wan you o consider i a game. You’re playing a game here, and no single round o his game is supposed o be very criical or imporan. Te enire mach is wha maters. You’re going o make some misakes along he way. When you do, jus move on and don’ ge atached o he resul. When you have a good experience, a good rade, don’ ge atached o ha, eiher. Play he mach poin ha is now, and don’ worry abou wha you jus did, or wha you hink you need o do in order o pay he ren.
174
THE WALLABY TRADE
For his reason, I don’ make weekly or monhly or yearly rading plans. And I sure as hell don’ make any rading goals or anyhing excep he rade in ron o me. How am I going o know wha I can plan or 6 monhs rom now? A a maximum, I can know ha a Wallaby rade is seting up righ now, on he EU/USD, and he only hing I can really do is plan o do my very bes wih his one opporuniy. I I ake care o business now, hen he res o i jus akes care o isel. Your abiliy o rade or a living is based on your abiliy o build pros over ime, one rade a a ime. Sounds obvious, bu all o us can very quickly become obsessed wih seting goals or wha we’re going o be able o buy wih pros ha we haven’ made ye. And hen, when hings go wrong, we become obsessed wih rying o ge back he money we los quickly. Insead, jus hink abou your nex rade, or he rade you’re in, and ocus on geting ha righ. I can’ say i enough: Your only responsibiliy is o proessionally manage your curren opporuniy. Takin Proft with Support and Resistance
Te easies way o plan or a pro arge on a Wallaby rade is o ge ou when you’ve seen your rade reach a previous high or low. You’ll remember he basic concep
PROFIT TARgETS FOR THE WALLABY
175
o suppor and resisance rom he chaper on sops.1 I you wan more help wih he concep, I’ve included some helpul resources in he Appedix Tree or you.
Exiing a Wallaby buy rade Buy Pro Example 1: EU/USD 15-minue In Figure 9-1, he EU/USD ses up a bullish Wallaby rade. Here’s he char:
FIg. 9-1: aking prof on a EUR/USD buy rade.
1. I miss ha chaper. We had some good imes back hen, didn’ we?
176
THE WALLABY TRADE
A poin “A,” he currency pair ses up a buy rade — i’s bullish Wallaby divergence. Te EU/USD makes new lows, which are oversold, and a he same ime he Wallaby makes higher lows. A poin “B,” we buy he currency pair because we see a bullish crossover on he regular Sochasic. Te approximae price or enry is 1.3005. You already know ha our sop-loss will go below he lows ha he pair made as i se up he rade — a abou 1.2955, or a risk o 50 poins (pips). Tis is no shown on he char because i’s he very botom o he price scale (look a he ar righ edge o he char). A poin “C,” when he pair reaches is mos recen previous high, we exi he rade. Te price a ha ime is 1.3125 (I’m rounding down here), or a pro o 120 poins. We risked 50 poins o ge 120. Nohing wrong wih ha. I’d love o keep ha raio going – wih a risk o 1 or a poenial pro o 2 – as oen as possible. Someimes he raio is even beter. Someimes i’s a bi worse. I he rade seup shows a risk o 1 poin or a gain o 1 poin, hen I’ll usually skip ha rade and wai or he nex one. I’s worh noing ha here exis more complicaed ways o planning a pro arge. We’ll even address some o hose mehods laer on. Bu I wan o say righ now ha his single example shows you everyhing ha has ever been imporan o me on he subjec o aking pro on a Wallaby rade. While i seems simplisic o jus draw a line
PROFIT TARgETS FOR THE WALLABY
177
across a recen high and use ha level as a pro arge, I’m elling you ha i doesn’ ge much beter ha his.
Buy Pro Example 2: HPQ 15-minue In Figure 9-2, HPQ ses up a bullish Wallaby rade.
FIg. 9-2: HPQ ses up a bullish Wallaby rade.
Lower lows on price, higher lows on he Wallaby. Ta’s all shown in poin “A”. Our enry a poin “B” comes a around $39.30. You can already gure ou ha our soploss is going o go jus below $39 – below he lowes poin ha he sock reached while i se up he Wallaby rade. For he sake o argumen, le’s say we pu he sop-loss a $38.90, so i i alls o ha level aer we ener he rade,
178
THE WALLABY TRADE
hen we’re geting ou. Ta would be a loss o abou 40 cens per share. Plus we have o pay ransacion coss and he spread. Ten we’ve go o ip he massage herapis o help us relax i we do in ac have an unhappy ending on he rade. Our pro arge comes a a previous high, and we don’ even need o move o a dieren ime-rame char or look ar back in ime o nd his level. In ac, he sock made a double op a abou $40.50 jus abou a day ago (on he char). Ta works jus ne or a pro arge. When he sock reaches ha poin (“C”), we can happily exi. I’s a move o $1.30 per share, or 3% on he sock, which is a perecly reasonable gain. And we risked only .40 o ge i. Bu wai. Is here more ha we can do here? Yes. Am I going o ell you wha ha “more” is? Yes. Ridin a Winnin Buy Trade
I jus love hese rades because we can ake a good pro arge a poin “C” and even make i beter. I you’re he ype o rader ha likes o ride your winners even longer, hen he nex char is or you.
PROFIT TARgETS FOR THE WALLABY
179
FIg. 9-3: Exending he prof arge on HPQ.
For Figure 9-3, I’ve moved o he 1-hour char. You can see he Wallaby divergence rendlines drawn on he sock on he righ side o he char, jus o give you an idea o where we se up he rade in he rs place. I you’re having rouble nding hose lines – jus look or he dashed black rendlines on price and on he Wallaby. I’ve moved o he 1-hour char or he purpose o going back urher in ime, seeing more candles, so we can nd a higher, previous peak on he sock — and we’re going o use ha as a secondary pro arge or he rade. A poin “1” in he char, we nd our srcinal pro arge
18 0
THE WALLABY TRADE
a abou $40.50. As you’ll remember, ha was a 3% gain in he sock. Bu wha i, insead o exiing he rade a ha poin, we sayed in longer? We can do ha, and here’s how: 1. We stay in the trade. When he sock reaches poin
“1,” we don’ exi he rade. 2. Move our stop-loss. Insead, we move our sop-loss o $39.30, so he wors hing ha can happen now is ha we end up wih zero money los on he rade. I’ve heard Jim Cramer reer o his siuaion as “playing wih he House’s money,” and ha’s an accurae way o describe i. Some raders a his poin sell par o heir posiion and ake some pro o he able. Ta’s no my syle, so I’m no even going o ge ino an expanded discussion o he opic. I say, i you believe he sock can go higher, say in he enire posiion. I you don’ hink i can go higher, exi he enire posiion. Make a decision and sick wih i. 3. New prot target. Now we have a new pro arge a poin “2,” and as you know, we deermined ha level by looking back in ime, as ar back as necessary, and drew a horizonal line (a resisance level) a he las obvious peak. I you sill don’ undersand how we ound ha peak or made ha deerminaion, please reer o he shor Appendix Tree resource secion on suppor and resisance, or do some Googling o suppor and resisance, or buy a book, or jus sop making i so difcul and jus realize ha we drew a line across a place where he sock previously couldn’ go any higher.
PROFIT TARgETS FOR THE WALLABY
181
Wha happens nex? Te sock moves up o he pro arge a posiion “2,” all he way a $41.60. Ta’s a gain o $2.30 on he rade, or 5%. Could you move he pro arge again, and move he sop again? And keep doing his orever? Te answer is yes. We’ll alk more abou his a he end o his chaper. For now, I wan o make sure we alk abou exiing a Wallaby sell rade. Exitin a Wallaby sell trade
Sell Pro Example 1: Gold 30-minue In nex char, you’ll see ha we ener a sell rade on Gold (spo price) a abou $1,421. Te precious meal has made higher highs wih price (which are also overbough) and lower highs on he Wallaby. Ta’s bearish Wallaby divergence. Our sop goes above $1,431. Figure 9-4 shows wo possible pro arges.
18 2
THE WALLABY TRADE
FIg. 9-4: Exending he prof arge on Gold.
When Gold his pro arge #1, a approximaely $1,410, we’ve made $10 on he rade (and you’re mos likely rading wih leverage here, so he gain is muliplied by ha leverage). I’s an impressive gain already. Here’s where we have a choice. We can ring he cash regiser and close he rade. Or we can move he sop-loss on he rade o break even and see i God will send he swee Cherubic Angels o Pro o serenade you. In oher words, we’re wondering i Gold can all o pro arge #2. In overnigh rading, ha’s exacly wha i does — i alls arher, all he way o $1,385 — which more han riples our rading pro o $35.
PROFIT TARgETS FOR THE WALLABY
183
Te precious meal alls even arher sill aerward, bu you ge he idea. Beore we coninue, I jus wan o remind you ha his rade could have sopped ou a a loss. We could have los jus over $10 on he rade (imes leverage!). No every rade will be a winner. By exending our pro arge, we’ve given ourselves o make $35 on he rade in exchange or risking abou $10. Ta’s a very reasonable risk:reward raio.
Sell Pro Example 2: USD/JPY 5-minue Figure 9-5 shows bearish divergence. Our enry on he rade comes a 81.30. Te sop on he rade would come above he highs ha he currency pair made beore we ook he enry. Ta number is abou 81.67 (see he quoes a he ar righ side o he char), or a maximum possible loss o 37 poins.
18 4
THE WALLABY TRADE
FIg. 9-5: USD/JPY rade. Profs 1 and 2 are near each oher.
Te currency pair makes higher highs on price, bu lower highs on he Wallaby. You migh also noice ha he regular Sochasic Oscillaor does no make separae overbough highs across he wo peaks in price. Does ha invalidae he rade seup? No. I’s jus a slighly pervered version o bearish Wallaby divergence, and we’ll happily sill ake he rade. I’s good o look a examples o rades ha aren’ quie perec, righ? Earlier in a previous chaper I menioned ha someimes he bes-looking rades end up perorming erribly. And someimes he rades ha look bad end up wih swee, delicious pro. Jus remember ha! Pro arge “1” is a approximaely 80.75. Ta’s 55 poins (pips) o pro, or an srcinal risk o 37 poins. Once
PROFIT TARgETS FOR THE WALLABY
185
again, our risk:reward raio is jus ne. Bu i we hold on or he second pro arge a poin “2,” we can exi near he 81.60 mark, or a pro o 70 pips. Now we’ve almos gained wice as much as we risked on he rade. Try it Yoursel!
DIY Example 1: IBM 15-minue ake a look a his 15-minue char or he echnology and consuling services gian, known or ormerly producing lapop compuers ha could also make a delecable Bananas Foser. Char:
FIg. 9-6: Look a Appendix wo or he answer.
18 6
THE WALLABY TRADE
Wha would you do here? Can you draw he divergence lines o se up he rade? ake a momen and do he ollowing: 1. Set up the divergence trade. Draw lines on he price,
and on he Wallaby, and show me he divergence. 2. Circle the trade entry. Show me a which candle (approximaely) we would ener he rade. Wrie your bes esimae or he price a enry over ha same area. 3. Set the stop-loss. Draw a border across he area where we’d sop ou o he rade. I he sock moves pas ha line, he rade is over and we sop-ou. 4. Set the prot target. Where is your rs pro arge? Does i reach ha level? Wha did we risk on he rade compared o wha we could have gained? Now ake a look a Appendix wo in he back o he book. See i you’ve drawn your lines and such in he same way I did. I yours are dieren bu also somewha similar, ha’s ne. Bu i you nd ha you ook a rade in a compleely dieren direcion, or ha his rade became a loss, hen go back o he seps above, and ry again, his ime using he char rom he back o he book as a chea shee. My Philosophy on Proft-Takin
Te more comorable you become a pracicing wih pro arges on hisorical chars, he more money you’re
PROFIT TARgETS FOR THE WALLABY
187
going o make in live rading. For me, i’s always easier o say in a good rade han i is o exi i and hen ry o nd a good place o re-ener. Wha I’m rying o say is, i you have a good hing going, you migh wan o consider sreching ou he proable run ha you’re having. In his order, here are my preerences or dealing wih a proable rade: 1. Move the stop and extend the prot target. Every
super-successul rader I know does his. urn your winners ino bigger winners. Increase he size o your average pro. Do his and you’ll be able o ride ou periods o ime when he rades don’ go as well. Do his and you’ll learn o be paien. 2. Exit the trade. Jus ake he money and run. As a reminder, I’m no a big an o exiing par o he rade wih a small pro and hen leting he res o he rade run. Again, here’s my view: I you don’ like he rade enough o say in i, hen ge ou. I I’ve bough 100 shares o HPQ, and he sock has moved $1 in my avor, I’ve made $1,000. I I sell 50 shares and bank $500, ha migh be saisying rom a psychological perspecive. I’m le holding 50 shares. Was ha a good choice?
18 8
THE WALLABY TRADE
Question: How ar does HPQ have o move in order o
ne me he same pro — $1,000 — as I had when I was holding 100 shares? Answer: I needs o move anoher $1 again. Jus o ge me
he same pro I already had a momen ago! I we’d jus held ono all 100 shares, and he sock had moved anoher $1, we’d now have $2,000 in pros. I you hink i can go up arher, le me ask you — why are you no holding ono he enire posiion? “Because,” you say, “I have no idea ha i will go up, so I wan o bank some pro now.” And i you have no idea ha i’s going up, and you’re unsure abou saying in he rade, hen why are you in i a all? Exi he whole posiion! On he oher hand, i you’re conden ha he sock can go up anoher ull $1 (which is wha i would ake o a leas equal he pro you already have), hen jus say in he ull posiion and move your sop so you won’ ake a loss. Te very wors ha can happen o you is ha you end up wih zero won, zero los — minus some small ransacion ees, o course. And hen you wai or he nex rade o se up, which doesn’ really ake ha long (here are hundreds o hese rades ha se up every week across he universe o nancial insrumens). By saying in he posiion longer when you have an obvious
PROFIT TARgETS FOR THE WALLABY
18 9
nex pro arge, you help ose your ransacion coss. You make more money or yoursel. emember, you have o pay axes on hese gains, and axes can be subsanial. You migh as well do everyhing you can o make he mos o wha’s going well. And i you don’ eel comorable saying in he rade — jus ge ou and ake he money. Keep banking your gains. What About Not Tryin To Be a Hero?
Do you remember rom a while back when I alked abou no rying o be a hero? I wan o make sure I clear up any possible conusion. I can sound like I’m conradicing mysel when I say, “Don’ be a hero,” and hen nex hing you know, I’m saying, “Exend your pro arge.” Mos people will quickly close a winning rade. Even beore i reaches he pro arge hey se a he very sar (and hey se ha pro arge based on experience and esing). Tey do his because hey have los so many imes, and hey’re jus very happy o nally have a good rade going. I’s odd bu rue o say ha many raders panic when hey’re winning — and hey ignore he losses when hey’re holding ono bad rades. You wan o do he opposie. You wan o panic when somehing’s gone wrong. And by panic, I don’ mean you should pee in your pans and sar reaking ou on your
19 0
THE WALLABY TRADE
amily. Wha I’m saying is ha you should be quick o exi a bad rade. So, back o he possible conradicion. Being a hero is when you keep your winning rade open bu do nohing o proec he pro. rying o be a hero is when you say, “I know I could move my sop o break even, bu I wan o give he rade room o breahe.” Herorading is when you wan o ac ough, insead o acing smar. rying o be a hero is when you rade wihou a cuo poin or your bad rades, like a rock-climber wihou proper gear or a sailor wihou a lie ves, or a hooker wihou a sash o condoms. So, when I say ha i’s a good hing o exend your pro arge, wha I’m rying o communicae is ha you ry o make more money while simulaneously removing or reducing any possibiliy o loss. How Do You Know When to Extend the Proft Taret?
Te hones answer is nobody knows. Tere are as many answers as here are raders. Bu here are wo ways you can deermine wheher or no o exend your pro arge. When he regular Sochasic is overbough or oversold. Le’s use he example rom Figure 9-5.
PROFIT TARgETS FOR THE WALLABY
191
FIg. 9-7: When we hi prof arge #1, we’re OS.
In Figure 9-7, you can see ha when we hi he rs pro arge on he currency pair, he regular Sochasic is already oversold (below he 20 line). Ta’s one way ha some people can decide o exi he rade and ake he pros. However, I wan o noe ha here are many, many examples o a nancial insrumen saying overbough or oversold or a longer period o ime aer i his he 80 or 20 level. In ac, look back on your chars (and he examples in his book), and you’ll nd ha here are pleny o imes when he guideline I’ve jus described will cos you money, insead o making you money. So, wih ha said, here’s Guideline #2. Just fip a coin. Seriously, I gota ell you sraigh: I have
19 2
THE WALLABY TRADE
no rigging idea how o absoluely ell he dierence beween rades ha go o pro arge #2 (or 3, 4, 5 or 6 or 10) and he ones ha sop a #1. Mos o he ime, I simply say in he rade longer i I’ve made money or he week, and I’m jus adding pro o an already successul sring o rades. I I’ve los money or he week, I say in he rade longer, because — wha he hell! I can’ ge much worse, and i I’ve made i o pro arge #1, hen my sop is a break-even, and I have a ree ride. I I’m jus saring o he week o rading, I’m more likely o bank he pro a #1, because I jus wan o sar making money and build up my condence and ge ino he groove o rading. Ta’s he way i works or me. I migh seem arbirary o you, bu i’s he way I do i. And I’d be happy o hear rom you i you can es a beter way o disinguish beween he rades ha go o #1 and he ones ha go o #2. I can’ believe i, bu we’re already a he end o he book. Beore I send you o o rade some Wallabies, I have a ew las words or you.
PROFIT TARgETS FOR THE WALLABY
193
APPENDIX ONE SETING UP YOU CHAS
Everyhing you read in his book can beapplied o he sock marke (including indexes and exchange-raded-unds – EFs), uures, currencies, and bonds. I’m happy or you o apply i o any marke you choose. o display he Wallaby indicaor on my chars, you’re going o need wo hings: Firs, a charing program; Second, a Wallaby indicaor or somehing equivalen. When I say ha you can use a “Wallaby Equivalen,” I am saying explicily ha you don’ need he Wallaby in order o rade he seups in his book. Oher indicaors work in similar ways, and ha should work ou jus ne. When you look or an indicaor ha is similar o he Wallaby, you should look under he “oscillaors” secion o your charing program. Ta’s where you’ll nd he indicaors ha measure overbough and oversold condiions. Please remember ha one indicaor is no beter han all oher indicaors. Ta kind o hinking ges raders ino rouble, when hey eel ha hey have discovered he Greaes Indicaor O All ime and hey are going o pay o he U.S. deci wih heir nex rade. Finding he “bes indicaor” is no some universal search. I didn’ creae he Holy Grail o
19 6
APPENDIX ONE
divergence indicaors. I ound somehing ha works very well or me. Bu as you’ll see on he Wallaby web sie and blog – I’ll pos divergence chars using all sors o dieren indicaors, o show dierences and similariies and so orh. Te Wallaby is my primary ool or nding hedivergence in he rs place. Bu i’s no he only way o do i, and i migh no even be he bes way or you. Chartin Prorams
I’ve had he Wallaby indicaor buil or a variey o charing plaorms, and i’s available or ree when you visi he Wallaby web sie. As o he ime o publicaion, he indicaor was available or heseplaorms:
Measock radesaion Ninjarader FXrek Inellichars Mearader eSignal MoiveWave And more are onhe way. You can check on he Wallaby web sie o see updaes on new releases. I you wan o have he Wallaby indicaor on your chars, do wo hings: Call your broker and le hem know o conac me, and also conac me and ell me o conac your broker.
SETTINg UP YOUR CHARTS
197
The Wallaby Indicator or Somethin Equivalent
Le’s say you’re rading wih a broker or charing plaorm ha does no oer he Wallaby. No problem. Le’s discuss some equivalens and how you can usehem. e elaive Srengh Index (SI) Here’s a char wih he Wallaby and he SI (se o 13) ploted on he same SP char.
FIg. A1-1: Wallaby and RSI ogeher
As you can see rom Figure A1-1, he Wallaby and he SI look very similar. You can play around wih your SI setings o nd somehing youlike. I have ound ha he SI
19 8
APPENDIX ONE
can end o nd divergences ha he Wallaby canno, and also he oher way around – he Wallaby someimes nds divergences ha he SIdoes no.
e Commodiy Channel Index (CCI) Developed by Donald Lamber, he CCI measures how ar an asse’s price has deviaed rom is average. I’s unique in he sense ha i doesn’ look – or move – in he same way as mos oher oscillaors.
FIg. A1-2: Te Wallaby and he CCI
In he above char, he Wallaby and he CCI (se o 14) si nex o each oher. Tey look and ac quie similar: When
SETTINg UP YOUR CHARTS
19 9
he Wallaby moves up, he CCI ends o do he same. I’ve noiced ha he CCI can make a sharper, more dened move han he Wallaby. So you’ll see a lo o sharp angles on he CCI. Ta’s jus wo examples o oscillaors ha work as more han adequae subsiues or he Wallaby. I you nd ohers – or inven your own – ha work well or you, please le me know on he witer sream or on he Wallaby web sie.
APPE N D IX TWO ANSWES O CHA QUESIONS
Earlier in the book, I asked you to draw a set o lines on a chart, to test your knowlede o the Wallaby trade. This Appendix contains a chart, an answer, and an explanation.
I your noes and drawings on he chars are signicanly dieren han mine, please don’ launch any grenades or hur anyone. o he imeabou here hese will berades. sligh However, dierencesnow in he way Mos you and I hink ha I’ve said ha – you need o know ha i you ge he rade direcion incorrec, hen you’re messing up he enire concep o divergence and you should sudy he example more closely unil you undersand wha you did wrong. I, even aer you sudy he example, you can’ nd ou why you and I go a compleely dieren direcion on he rade, hen make sure you’re looking a heconsider righ example. you sill ge a dieren answer, you migh ha you Ididn’ make a misake a all, bu raher han he book conains an error. I ha’s he case, hen I apologize prousely. Ta’s unaccepable. I’ve double and riple checked heseexamples, so ha shouldn’ be he case. Bu i iis he case, I wan youo know I undersand how rusraing ha is.
20 2
APPENDIX TWO
Answer to Fiure 9-6
In Chaper 9, I asked you o ideniy some divergence on a char. Here’s my version o he char:
FIg. A2-1: Answer o Figure 9-6
I’m sure you ound he bullish Wallaby divergence. Te sock is making resh lows on price while a he same ime making higher lows on he Wallaby. Boh areas areseparaely oversold on he regular Sochasic Oscillaor. Our buy enry comes a approximaely $123, and he sop down below he lowes price he sock reached beore i se up he rade. Ta’s a abou 122 (which is below he lowes
ANSWERS TO CHART QUESTIONS
203
quoe displayed on he righ side o he char). Te pro arge comes a abou $126. Ta’s a move o $3, or abou 2% or he sock. A perecly reasonable pro and risk:reward raio. Tere is no obvious pro arge #2 on his rade. I’m sure i we moved o a higher ime rame char and wen back urher in ime, we’d easily nd a second pro arge o work wih here.
APPEND IX THR EE ESOUCES AND FUHE EADING
Support and Resistance
Te bes raders in he world undersand he basic conceps o suppor and resisance. I doesn’ mater i you’re a rend rader or a couner-rend rader. I jus makes sense o ge a oundaion in ideniying hese areas. Tere are wo books ha sand ou, in my opinion:
“Pring on Price Paterns”(Marin Pring) “echnical Analysis o Sock rends” (Edwards andMagee) Basics o Technical Analysis
wo books on his subjec have been on my shel or years. Tese are excellen inroducions o he primary amily o indicaors and ools ha raders use on heir chars. “echnical AnalysisExplained”(Marin Pring)
“echnical Analysiso he Financial Markes”(John Murphy) I you’re going o spend a lo o ime looking a he chars, i makes sense o have one (or boh) o hese reerences
20 6
AP PENDIX THR EE
ready on your desk. I believe ha rading sysems come and go. Tere are los o ways o make money rading. No one in paricular has he single bes mehod, or he one exac way ha you have o use an indicaor on a char. Ta’s why learning abou he indicaors or yoursel can be so helpul. Tese wo Web sies are also invaluable resources or diving ino echnical analysis:
invesopedia.com sockchars.com/school Economic Fundamentals
Tere are wo reerences ha I go back o ime and ime again:
“Currency rading and Inermarke Analysis” (Ashra Laidi) “e rader’s Guide o Key Economic Indicaors” (ichard Yamarone) Tere are los o oher books on his subjec, and Amazon is ull o choices. I like Ashra’s book because i helps pu pieces o he puzzle ogeher and answer quesions abou how dieren nancial insrumens aec one anoher. Te second book is valuable iyou wan o sar o undersand he useulness (or uselessness) o economic numbers released by he governmen.
RESOURCES AND FURTHER READINg
207
What it takes to be a trader
Tere is no one way o rade. Successul raders do no all look alike. Tey rade dieren markes, keep dieren schedules, avor he rend or rade agains i, and so orh. Every successul rader nds her own way o he goal o rading or a living.I regularly reer back o hese hree books o remind mysel ha being a successul rader requires consan deense o one’s individualism.
“Millionaire raders”(Kahy Lien and Boris Schlossberg) “Marke Wizards”(Jack Schwager) “eminiscences o a Sock Operaor”(Edwin Leevre) More Books
Alhough I have a large and growing collecion o rading books, I nd ha books on oher subjecs are ar more imporan. I believe ha raders don’ read enough poery, hisory or cion. Seriously! I’m no joking around. Te vas majoriy o raders wan o spend all heir ime hinking abou he markes. When i comes o being a paien, independen-hinking, cu-your-losses, ride-yourwinners ype o rader, however, here isn’ anyhing beter han reecing on oher subjecs.
20 8
AP PENDIX THR EE
A ew books come o mind, alhough his lis is ar rom exhausive.
“Good o Grea”by Jim Collins may be he bes rading-as-abusiness book ever writen, and i’s no even abou rading. I’s abou running a grea company or he long haul. Te lessons rom grea companies conained in he book are 100% applicable o becoming a grea rader. His companion book, “How he Mighy Fall,”is equally sunning in he clariy wih which he describes how businesses and (as you’ll see) raders ail. Speaking o ailure, I highly recommend Jared Diamond’s excellen work, “Collapse,” or he same reason. Sudy he grand ailures in world hisory, and you’ll sar o see a patern o sel-saboage ha emerges in individuals and socieies. Avoid hese pialls, and you jus migh say solven long enough o rade or a living. Mos people hae poery, and I’m no going o lie — i’s no my avorie. Bu when I ake he ime o si down wih somehing by Wal Whiman, or John Milon, or Dane, or ober Fros, my mind changes gears. aPrs o my brain wake up. I see he world a litle bi dierenly. For goodness sakes, ge ou o your elemen! ead somehing ha simulaes your brain hopper! Good cion plays he same role. My avorie work o cion migh be Joseph Conrad’s“Hear o Darkness.”You hink
RESOURCES AND FURTHER READINg
20 9
you’re no prone o empaion? You hink you’re going o do somehing your own way, ignore he warning signs in ron o you, and everyhing will be okay? So did Kurz. And he nex hing you know, he guy’s eaing human esh and running around naked in hejungle. Las o all, biographies osuccessul people are my avorie way o reminding mysel o he basic ingrediens o a successul endeavor: persisence, rugaliy, ery deerminaion and luck. O every book you could choose inhis caegory, here is one ha sands ou apar rom he res. I’s on Chernow’s “ian,” which chronicles he lie o he greaes American businessman who ever lived — John D. ockeeller. Do no pass up he chance o diges he book and he lessons rom he lie o America’s riches man. In shor, please read more, and read more expansively. And lisen o, wach and involve yoursel in aciviies ha are posiive. Fill your liewih posiive people. Delee rom your lie people and siuaions ha are oxic. Does someone hink you can’ rade or a living? Shu hem up orurn hem o by never alking o hem again.
APPENDIX FOUR ESING HE WALLABY
Some people will read his book (I’d guess hree o our people, a leas) and hen immediaely begin o rade he Wallaby. Tere’s no subsiue or learning how o rade a sysem using real money. Tere’s also no beter way o needlessly lose money. I’s a rade-o: While i’s rue ha paper rading doesn’ give you he same adrenaline rush as live rading — and hereore, i’s no as “accurae,” in a sense — i’s also down rue ha paper helps you ge he oundaion beore yourading commisimply o anyhing. Tere are wo kinds o paper rading or “esing,” as I call i. Te rs syle o esing involves moving backward in ime on your chars, and hen playing he candles orward and ideniying every rade seup ha emerges. Ten you wach he rade seup play ou and es your heories abou how price should move. You can do his by programming rules ino soware and having i spi ou a repor. You can do his manually by scrolling back on your chars or by using a program such as Forex eser (which simplies his enire process or currency rading). Because his syle o esing les you move hrough a subsanial amoun o marke aciviy in a relaively shor period o ime, I’d recommend working hrough a leas 200 o 300 seups beore ever
21 2
APPENDIX FOUR
rading wih real money. I sounds like a lo o esing, bu i’s an enjoyable process. I you’re a shor-erm rader — a day-rader — hen I’d srongly recommend spending 15 o 20 minues every day beore your rading session running hrough 10 o 20 rades in he manner described above. I ses he one or he rading day, and i ses your ocus. Once you’ve compleed his process, i’s a good idea o move on o he second syle o paper rading. Tis involves opening a demo accoun (or a pracice accoun) wih your broker — or racking a virual porolio online. You can do his easily or uures, socks, and orex, and here really isn’ any excuse or no geting yoursel se up o do his. When you have your virual porolio or demo accoun open, you simply wach or and rade real seups ha occur in live marke condiions, bu you commi only “pracice” dollars o he rades. I’d recommend opening he pracice accoun wih he same amoun o money you inend o rade when you open he accoun wih real money. I’d also sugges ha you work hrough a leas 20 o 30 rades wih a sysem in his manner beore you rade live. A very small percenage o people, less han 1%, I’d imagine, ever do eiher o hese kinds o esing beore hey rade. I’d sugges you become par o he 1%. When you es beore you rade, you accomplish he ollowing:
TESTINg THE WALLABY
213
You understand the rules o the system. You
don’ wan o be wondering abou wha o do in he hea o he momen when a rade is going wrong. We make errible decisions as raders in hese ense momens. Our monkey-lizard brain akes over, and we invariably rever o gh-or-igh menaliy and end up eiher ghing he marke (bad idea) or eeing a perecly good rade because we reaked oualso ( a bad idea). You don’ have o go all gh-or-igh on your rading accoun! Tere’s a hird way, and i’s called Sicking Wih he Plan. Mos raders don’ even have a plan o sar wih, so hey’re obviously going o be making all kinds o crap up on he y, while in he wors possible emoional sae. You don’ wan o be par o ha crowd. You’ll take the trades you plan.When
you es or a signican lengh o ime beore you rade, you’re likely o ake every rade your sysem produces. Have you ever ound ha you can alk yoursel ou o a perecly good rade or reasons ha don’ have any bearing on he sysem you’re rading? I nd ha when I’m reading witer updaes rom people I respec, I sar o wonder i hey know more han I do, and i I shouldn’ avoid my nex rade on he EU/USD. We all do his. No one is immune. I you hink you are, hen you’re God, and I’ll see you on Sunday. You won’t take the trades you don’t plan.Anoher errible
hing I’ve done in he pas is ake o-plan rades. You know wha hose are. Tey’re rades you never planned o ake bu suddenly seemed like a good idea. Tey rarely are. You see a
21 4
APPENDIX FOUR
recommendaion rom someone, and you blindly ollow i. Ten you nd ou laer hey really didn’ ake he rade you hough hey did, or somehing o ha eec. I’s a errible habi. I’s impulsive. We all all prey o his once or wice (or many more imes, in my case) in our rading careers. When you es beore you rade, you’re less likely o ollow someone else’s advice, and you’re more likely o ollow your own plan. Because you pu imeino i, i means more o you. Because you’ve invesed subsanial eor ino your rading success, you’re less likely o wan o inves your resources on someone else’s idea. I have already said i, bu i’s worh repeaing: esing is he engine ha drives he pro machine. rading isn’ easy. rading is perhaps he hardes proession ha you can choose. esing doesn’ ensure success, bu i can help you avoid common problems. While i’s rue ha pas perormance is no indicaive o uure resuls — which means ha even a sysem ha ess proably in he pas is no a guaranee o success — i sure as hell beas no having any idea wha you’re going o do every day. For more inormaion abou he esing ha I’ve done on he Wallaby — and more han 200 chars o he EU/USD — visi he Wallabyrade.com Web sie, and look or he keyword “esing.”
TESTINg THE WALLABY
215
APPENDIX FIVE DEALING WIH ADVESIY
No all rades (or people, or ha mater) can be winners. I spen all my high school years wandering around he halls, hoping he bell would ring and save me rom looking supid and alone. I, jus like anyone else, sruggle wih sel-doub and imes when Ieel like giving up. Te absence o adversiy isn’ a sign o success; i’s a sign ha you’re no rying o do anyhing worhwhile. I’s only human o wonder i you should qui rading a sysem (or a all) when you have a ew losses in a row. How many losses in a row are oo many? For Wallaby rades, you really shouldn’ ever see more han our consecuive losses. Wih abou 1% los per rade (i you handle your money managemen well), ha’s no a big deal. I’d be all righ wih even six or seven losses in a row. I sar o ge worried i unil why aerIha Iwouldn’ have consecuive loss es, I haveabou o consider ookpoin. hoseI losses beore I ge overly concerned. Firs, I ask mysel: Did I ollow he rules when I ook hese rades? I he answer is yes, hen I’m ully ready o have six or seven losses in a row, i ha’s wha happens. And I’m no going o worry abou i. Because I ollowed he rules, I should
21 8
APPENDIX FIVE
be okay. I I didn’ ollow he rules — i I ook early enries or dumb exis, hen I need o sop rading or a day or so. Second, I ask: Did I ake larger han usual (more han 1%) losses on hese rades? I he answer is yes, hen I need o sop rading — or a leas a week. I you nd yoursel aking big losses, hen he problem is no wih he sysem. Te problem is ha you’re gambling, and you need o sop. In a momen I’ll menion some hings you can do when yousop rading or a ime. Wha i you have a losing monh? For hose o you who are planning on rading or a living, he quesion arises: Wha happens i you go an enire monh, and you’ve los money? My answer is: You ake your living expenses ou o your accoun, and you move on o he nex monh. And you’ve had a ne wihdrawal on he accoun. No wha you’d wan, bu ha’s lie. No every monh is going o be a winner. I you’re hinking ha raders like Seve Cohen (o SAC ame — i’s one o he larges hedge unds in he world) don’ ever have losing monhs, you’re missing he poin. Individual raders a his rm do in ac have losing monhs. Ever y hones rader on he plane is going o have losing monhs. I’s jus going o happen. When i does, you jus move orward. Don’ change oo much, unless you’ve been breaking all kinds o rules wih your rading. And i you’re breaking all kinds o rules wih your rading, hen you deserve o have a losing monh.
DEALINg WITH ADVERSITY
219
As I was wriing his book, I sared breaking rules and holding ono losing Wallaby rades — and I’m he auhor o his book! Wha a jackass, righ? Well, we’re all ha same jackass someimes. We all do his. None o usis exemp rom making misakes. Te bes raders in he world go hrough periods o ime when hey’re sel-desrucive. Tere’s no one excepion o his — no Warren Buet (see his invesmen in Solomon Brohers), no Seve Cohen, Julian oberson, San Druckenmiller, or any o he “marke wizards” you’ve read abou. Every grea rader has a sory abou he ime he was a complee screw-up. Coming back rom ha is par o wha makes you, one day, a grea rader. In oher words, he deniion o being a grea rader isn’ he absence o misakes; i’s he abiliy o deal wih misakes in a posiive manner and come back. o prepare yoursel or a losing monh, I’d recommend seting aside pros each monh orweek — a rainy day und, in oher words — o compensae or imes when he marke doesn’ cooperae, or hose imes when you’ve ollowed he rules and you go smacked around. Ten, when you have a monh ha jus doesn’ work ou, you can ake a bi ou o your rainy day und, and you migh no have o wihdraw money rom your rading accoun.
22 0
APPENDIX FIVE
Anoher idea is o se aside one exra monh (or wo) o living expenses beore you even sar rading, so you’re menally prepared or ha one bad monh. Maybe i will never happen. By preparing in advance or i, he prospec o having a bad monh won’ scare you (and you’re likely o do much beter i you aren’ araid). One o he smares hings a rader can do is lower her living expenses. Everyhing in lie is easier when you don’ have money problems. I have ound ha here are very ew problems in lie ha canno be solved wih cash.1 I you have a losing monh (I know I’m repeaing mysel here), and i’s because you didn’ ollow your rules, hen you’re in rouble. I means ha you ook wha should have been a good monh and you urned i ino a bad one. Wha’s o say you will ever have a winning monh again? No much. I you can’ ollow your rading rules, hen sop rading, and go do somehing else ha doesn’ require ollowing rules, like running or Congress or being presiden o a small, Caribbean naion. Make a decision o make i work. I decided some ime ago ha I wasn’ going o le adversiy ge in he way o somehing I wan o do. One reason I don’ se goals is ha I believe goals are hings you wan o do, hings you’re going o ry o accomplish.Here’s how I view i: You eiher ge su done or you don’. I don’ se goals. I jus decide o do hings — or no o do hings. And i’s as simple as ha. Once I decide o do somehing, ha’s he end o he discussion. I jus doi.
DEALINg WITH ADVERSITY
221
When you’re aced wih adversiy in rading, i’s easy o suddenly nd yoursel re-evaluaing wheher or no you should coninue. I hink ha’s a load o crap. Wheher or no you’re going o rade or a living is a decision you make one ime. A some poin in ime you sill have a rading accoun, and you’re rading or a living, or you don’ have a rading accoun anymore, and you’re no. I you’re consanly rying o make up your mind abou somehing, you’re losing valuable ime in acually geting ha somehing done. I’m no saying you should keep deposiing money in your rading accoun (also known as ushing your lie’s savings down he oile). Bu I am saying ha you se a cerain amoun o money aside, and hen you — Proec ha money rade ha money I you ocus well enough on #1 above, hen #2 akes care o isel. Seriously! I’m no joking around here. I you proec he base accoun balance, hen you’re going o nd yoursel in a posiion o make money over ime, even wih a losing monh — even wih wo losing monhs!
1. elaionship problems canno be solved wih cash. Bu herapy migh help, and guess wha herapiss like o be paid wih? Cash! Oher problems ha you can solve wih cash: loneliness, ooh decay, hunger, boredom, lack o syle, and o course, povery.
22 2
APPENDIX FIVE
When o sop: I’ll repea a ew reasons ha you should sop rading. I any o hese hings happen, hen sop. You aren’ ollowing your rules, and you’ve los more han 5% o your accoun balance. You lose more han 10% o your accoun balance in any period o ime. You regularly ake rades ha you did no plan o ake (wheher proable or no). You regularly do no ake rades ha you did plan o ake. (Tis comes rom second-guessing oo much.) When hese hings happen, and you sop rading, here’s a hree-sep process I’d encourage you o ollow: ransparency. alk o your spouse or paren abou wha you’ve done. Ge i ou in he open and hide nohing. Bring accoun saemens and journal enries o he conversaion. ransparency solves nearly all rading problems. esing. eurn o esing your sysem. Follow he seps I’ve oulined or esing, and do a crap-on o addiional esing or he sysem you rade. By re-esing wha you already (should) know, you reinorce he good su. You remember how o avoid he bad su. ime. Never be araid o ake ime o rom rading. ake a day o now and hen, aer a loss or a big win. ake a week o on a regular basis. Make his ime o a oal vacaion rom
DEALINg WITH ADVERSITY
223
he markes. Clear your head. Ge away rom he compuer. When you eel yoursel sor o losing your rading balance, hen sep o he carnival ride and ake a break. raders oen ask me, “Bu wha i his means I’m going o miss some o he bes rades?” I jus answer, “Tere will be 1,000 Wallaby rades beween now and he end o he year. Are you hinking ha he very mos imporan one is coming oday?” One rade should never mater.Sop worrying abou missing ou on rades, and sar worrying abou missing ou on lie. Tis advice wasn’ comprehensive. Tere’s room in an enire book o alk more abou dealing wih losses and wins, bu his should ge yousared.
APPEN DIX S IX WHA O RDE
Wha nancial insrumens work well wih he Wallaby? Here are some houghs. Firs, rade he securiies you know. I you know socks, hen I’d sugges sicking wih socks. Don’ aler your rading plan o rade some new nancial insrumen because you heard ha i works beter. I you’re amiliar wih he essenials o rading socks, henbook i makes sense oyou rsalready applyknow. wha you’ve learned in his o somehing However, i you eel ha you’ve go o make a change, and you wan o sar rading somehing dieren, pick up a book and sar reading on he Web abou he new nancial insrumen you’ve chosen. Spend a couple omonhs geting amiliar wih he new marke beore you make any moves. Second, rade he ime rame you know. I you’re a day rader, hen i doesn’ make sense o pick up a book and expec ha overnigh you’re going o become a long-erm rader. As you already know, day raders and long-erm raders have dieren menaliies, varying degrees o paience wihrades, and so orh. I you have decided ha now is he righ ime o make a swich on which ime rame you wan o rade, I’d sugges picking up a good book on rading psychology, such as Mark Douglas’s excellen ome, “rading in he Zone,”
22 6
APPENDIX SIX
or visi Bret Seenbarger’s insighul blog (jus Google his name; he’s amous) and sar reading. You’ve already gured ouha he keyhere is paience. Tere’s no magic nancial insrumen or ime rame. Wha maters is ha you ake he necessary ime o ge amiliar wih who you are, wih wha you’re rading, and your expecaions or he ime rame in which a rade will complee. Ta’s wha maters. Wih all o ha cleared up, I’d like o alk a bi abou our markes: socks, sock indexes,uures and currencies. I you’re going o rade he Wallaby on socks, I’ve looked a some o he bigger names — IBM, HP, XOM — and I liked wha I saw. Even on he shorer ime rame chars, I liked he way hese socks moved wih he divergence seups. I you have experience and rade oher socks (including smaller cap issues), I’d love o hear rom you abou your experiences wih he Wallaby. Stocks.
Stock Indexes. You
can rade he indexes hrough uures conracs, EFs, opions, muualunds — a variey o ways. I wan o clearly sae ha beore you rade any sock index wih he Wallaby, you should pu your esing ime in. I’d sugges a leas 500 esed rades and a leas 50 live paper rade seups beore you commi real money. Successul sock index raders are some o hesmares, mos dedicaed, mos enacious people I know. And you’ll be rading wih hem
WHAT TO TRADE
227
when you choose o rade he $SPY or he $ES. Te Wallaby can work ne wih hese nancial insrumens, bu you’re deniely running wih he big dogs when you join his crowd. Futures. Corn,
beans, oil — you name i. Fuures rading has los some volume o currencies over he pas 10 years, bu i’s sill a huge businesswih ens o housands o raders specializing in hese issues. Fuures rading is exchangedriven, which means ha here’s a cerain amoun o price ransparency, which is very appealing o some. Also, you can easily access deph-o-marke inormaion, which or some is very imporan. I don’ rade uures a all. I’s no my hing. Bu I’ve been waching he Wallaby on a variey o uures conracs — in paricular, oil — or some ime now, and I like wha I see. I you’re a uures rader and you have an ineres in esing and rading he Wallaby, I’d love o hear more rom you. Currencies. I
rade currencies exclusively, and my primary vehicle or Wallaby rades is he EU/USD. I also very much like he way he Wallaby ses up rades on he USD/ JPY on he shorer erm (5- and 15-minue) chars. Te currency marke has enormous liquidiy. I moves very as. I oers subsanial leverage, even aer governmen regulaions in 2010 orced margin requiremens upward. I you enjoy macroeconomics, rends ha las or long periods o ime, and a as-moving marke, hen currencies migh be a good . However, I’d suspec ha more han 95% o
22 8
APPENDIX SIX
currency raders lose money on a regular basis. Because he marke moves as, and especially because so much leverage is oered, i’s easy o lose a subsanial amoun o money very quickly. I you choose his marke, I srongly cauion you agains diving in wihou compleing your esing rs. I’m always ineresed in hearing rom you i you rade he Wallaby on any nancial insrumen, any ime rame, in any marke.
WHAT TO TRADE
229
APPENDIX SEVEN MONEY MANAGEMEN
When I look back on his book, I hink I should have writen 150 pages abou risk and ve pages abou he Wallaby. I’m sorry I didn’ do ha. When we sar ou as raders, we rarely consider he risks. We sar o hinking abou he rewards. I’s naural. Wealh is a moivaingorce. We are atraced o wha we wan,and we ocus our minds on i. Te hough ha we rade, migh asomeday accomplish somehing grea (a proable series o proable rades or rading or a living) drives us orward, even during he bad imes. However, he hope o making a lo o money can also be a disasrous emoion, pushing us onward, even when we have proven ha we are impulsive risk-akers. I’s imporan o know yoursel beore you sar rading. And i’s imporan o undersand wha his book is abou, and wha i’s no abou. o a cerain exen, aer I wrie his book and you have i in your hands, i’s your book, oo. I did he bes job I could wriing i. And you clearly wan o do he bes job possible implemening wha you’ve learned. Wha you do rom here on ou si up o you. I can’ push he butons or you. I can’ place your rades or you.
23 2
APPENDIX SEVEN
A he same ime, I wan o repea somehing I said many imes earlier in his book: Please consider keeping a igh sop on your Wallaby rades. A sop jus above he highs or jus below he recen lows would be ne. Tese rades aren’ deserving o your paience or hope. Hope is no a rading sraegy. I he rading isn’ working ou, i isn’ working ou. You jus move on and ge ou. I you’ve broken his rule, and you’ve le a rade go agains you, i becomes harder and harder o close as i ges worse. I’s a errible realiy abou rading. I you se a sop-loss a he ime you ener your rade, i’s done. I you se a reasonable small rade size on each rade o begin wih, you’ve done more han mos raders do. I you never overexend yoursel, i’s hard o imagine geting ino errible amouns o rouble on hese rades. Sep one is o simply limi he risk you ake on each individual rade. rading or a living isn’ abou scoring he big win, no mater wha you read in he headlines abou amous raders hiting he jackpo. For every gian rade ha led o an enormous payo or a amous rader like John Paulson, here are a leas 100 individuals or unds ha wen bankrup. I’s why you hear abou jus a ew people making huge money in he nancial crises, bu you hear abou housands o people who were wiped ou. As raders we xae our minds on he big winners, and we associae ourselves wih hem, orgeting how easy i is o become jus anoher losing saisic. Please don’ do ha.
MONEY MANAgEM ENT
233
Te second mos imporan hing you can do is o ride ou your winners. I know I’ve said his repeaedly.I know I’ve no been he bes example ohis in my own rading. I’m beter a wriing hese words han I am a ollowing hroug h on hem. Bu he ac is ha mos o us say in our losing rades longer han we should, and we don’ say in our winning rades long enough. urn i around. Our earul rading mind — he mind ha remembers he losses — is so happy o have a win ha we quickly move o bank he pro beore a rade is ully maure. Our hopeul mind looks a a loss and dreams ha i can (and should) urn around. In each case, we are me wih disappoinmen. I’ve ound ha even raders wih very modes pro arges on heir rades end o close he rades ou early. I doesn’ seem mater i we’re going or 10 poins or 100. When he rade sars moving o our pro arge, we become proecive o i. I’s like we’re sill living in caves and proecing he kill we made, because we know i could be weeks beore wend anoher anelope ou on he plains. I you’re having rouble wih his (and mos o us do a one poin or anoher), here are some houghs ha have helped me. I you nd ha you jus can’ ge ino he habi o leting your winning rades ride all he way o he pro arge, sar wih jus one or wo rades. I doesn’ mater which rades hey are. Aer you’ve aken a ew modes proable rades or he week, consider leting he nex wo rades ride ou longer, all he way o your pro arge. Don’ ry o make a lo o
23 4
APPENDIX SEVEN
progress in a shor ime. Jus do i once, wih one rade. One sep orward is beter han nosep a all. Don’ ry o pick he “bes” rade. Jus pick a rade, rom he sar, and decide ha his one rade is going o say open longer i i is proable. Ten do i again anoher ime. Don’ pu yoursel on some kind o schedule or deadline o do his. Jus do i when you can, and he habi sars o orm. Mos o us never become grea a his; I’ve me housands o raders, bu very ew are consisenly able o say in heir winning rades all he way o he pro arge. I hope his isjus he beginning o our conversaion abou risk managemen. For me risk conrol is more abou psychology han i is abou numbers. Le meknow wha you discover or yoursel.1
1. For more inormaion abou he numbers side o risk managemen, I recommend alph Vince’s heavy-on-he-mah “Handbook o Porolio Mahemaics,” which I’ve no been able o compleely diges all he way mysel, bu i has been equally challenging and hough-provoking.
MONEY MANAgEM ENT
235
A PPEN DIX E IgHT HOUGHS ON COUNE-END RDING
Wha‘s he deniion o a rend? Is i a move on he daily char wih higher highs and higher lows? Is a rend only a rend when a nancial insrumen says above is 20-period weekly moving average? When does a correcion become a ull-blown rend? Tese are reasonable quesions in a book abou counerrend In many exampleschar, o rades book, I’ve shownrading. a 15-minue ime-rame wihina his couner-rend divergence rade seup. Bu ha rade could very possibly coordinae wih an overall rend on a longer ime-rame char. When you look a i rom ha perspecive, you’re rading wih he rend, raher han agains i.
23 8
APPENDIX EIgHT
FIg. A8-1: An upward rend on he 1-minue EUR/USD.
I you ook a couner-rend rade on he EU/USD, using Figure A8-1 as your char, you’d be selling he pair. Bu i you did ha, you’d be rading in he direcion o he overall, 4-hour rend rom he char in Figure A8-2. So whichsii? Is i a couner-rend rade or a rend rade?
THOUgHTS ON COUNTER- TREND TRADINg
23 9
FIg. A8-2: A downward rend on he 4-hour EUR/USD.
I doesn’ really mater wha you call i. Ta’s wha I say. Tis is a book abou rading agains he recen rending movemen on whaever ime-rame char you’re looking a. In ha sense, his is a book abou couner-rend rading. I is always goingand o agains be he case ha you’re radingAnd wihhere someone else’s rend, someone’ s else’s rend. are always going o be naysayers. I won ’ mater which direcion you rade. I you sar alking abou your rades in public, you’ll always nd someone who hinks you’re an idio. Aer a while, we all learn o ollow wha we have e sed and sick o our own plan, or we don’. I’s no very complicaed.
24 0
APPENDIX EIgHT
People someimes wonder i i’s reasonable (or responsible) o ry and “pick a op” on a shor-erm char.
He who ries o pick a botom only ges a sinky nger. — ob Booker
Abou once a week when I ake a rade, someone on witer menions how ridiculous i is ha I’ve ried o pick a op or a botom. And my answer is his: Every single ime you’re aking a rade, you’re making a choice abou he direcion o a nancial insrumen. You’re eiher beting ha i will coninue o go up or down, or ha i won’. Saying ha one syle o rading issmarer, saer, more responsible, wins more o he ime — or whaever, is preposerous. Do you wan o know wha works bes? Finding wha works or you, and shuting ou he res o he chater. Cuting o your losses quickly so when hings go wrong, you don’ suer a loss o a subsanial amoun o your accoun. iding ou your winning rades. Tose are imeless principles, and heydon’ have anyhing a all o do wih rends or couner-rends.
THOUgHTS ON COUNTER- TREND TRADINg
241
A PPEN DIX N IN E AN INVIAION
I hope you’ll do he ollowing:
Follow me on witer.You can nd me a @robbiebooker on witer, and rom here I’ll ge you on your way o ollowing Wallaby rades (which by he ime o publicaion also has is own witer accoun). Here you’ll see me pos Wallaby chars, alk abou he marke generally, and do some wisecracking. isa grea place o ask quesions, posyour own chars andTis engage in conversaion.
Mark up he book, do some esing, say in ouch.Wrie quesions and commens in he margins o his book. Scan he page where you have quesions and upload i o witer and ask me abou i. Do some esing and pos he resuls. Engage in conversaion wih oher raders abou his — or abou anyhing. Jus ge ou here and sar communicaing wihabou oherour people. We generally do beter when we openly alk rading.
Pos your rading resuls.Use a service like Pro.ly or jus blog i. Pos your rade resuls. Tere isn’ anyhing beter han accounabiliy. I’s he bes orm o moivaion and discipline ha I know. Le he world see wha you’re doing. Don’ worry abou people copying you. You’re no engaging
24 4
AP PENDIX NI NE
in arbirage on whea uures across hree world markes. You’re jus aking a rade. I you buy IB M, you wan everyone in he world o know i, and o buy i wih you, righ? Ask quesions. Some ideas or quesions: What indicator works best or me to set up diverence trades?
I’s no necessarily he Wallaby Indicaor. You migh nd ha he CCI or he Momenum indicaor work beter or you. I welcome variey and individualism in rading. A he hear, his is a simple book abou rading agains he recen rend. And here are hundreds o ways o do i. Consider looking a candle paterns or price paterns when planning divergence rades. Consider comparing he way ha you do i wih he way ha oher raders do i. I his book is a saring poin or you o consider his ype o rading, I will have done wha I waned o do. I’m no he sarring acor in your rading lie. You are. Te Wallaby isn’ imporan. I’s no he only or bes indicaor. You’re he mos imporan elemen in your rading. Le your creaiviy ou. I you would like o sugges improvemens, ell a sory abou how you alered an indicaor o plan divergence rades — I’d love o hear rom you. Please say in ouch abou ha.
AN INVITATION
245
Can I trade with the trend better than aainst it?
In he previous appendix, we ackled his quesion. Tere is no one rend or one couner-rend. Tere are movemens on all kinds o chars, and hey don’ always say he same hing. However, i you nd a rend on a daily char, can you nd good places o rade wih ha rend by using he Wallaby rade on a shorer-ime rame? Can i help wih your enries? Do you nd ha hese kind o “rend rade Wallaby rades” work beter or you in esing? What is the optimal amount o risk per trade or me?
Are you aking oo much risk in your rading? How much risk is appropriae or you? I srongly encourage you o deeply hink abou his by yoursel and wih a group o raders. Tink abou his quesion in mahemaical erms, and in psychological erms. From a mahemaical sandpoin, hink abou how oen you win versus how oen you lose. Tink abou he size o your average win agains he size o your average loss. Tink abou he number o consecuive losses ha you’ve experienced in your esing and live rading. Tink abou he size o he bigges loss you experienced in esing: Wha percenage o your oal accoun balance was i? Wha percenage o your ne pro over he preceding 20 o 30 rades was i? Tere are hundreds o addiional ways o hink abou risk,and i bears repeaing: When you ge a handle on risk, you ge a handle
24 6
AP PENDIX NI NE
on your rading. I’s no abou magical indicaors. I’s abou no losing money … and hen making money. When you hink abou risk rom a psychological perspeciv e, consider how you eel when you are in a losing rade. Wha are your endencies in ha siuaion? How well do you handle losses? Gains? Do you become wild and angry when you lose? Or euphoric when you win? How does ha aec your rading? Is one ype o emoional sae more benecial o your rading? Can you race your emoions on each rade and nd how hose emoions have played a role in your perormance? How do your relaionships aec your rading? I could keep lising ou quesions like his all day long, bu you ge he poin. What do I want to et out o tradin?
Sar wih he end in mind, as Sephen Covey would say. Are you rying o make enough money o pay your morgage? All your living expenses? Wha is success in your mind, when i comes o monhly rading perormance? Is i abou never having a losing monh(which is probably impossible). Is i abou never having a losing day (which is deniely impossible). Wha exacly do you believe you’re capable o doing, and wha do believe he marke is capable o providing o you?
AN INVITATION
247
What is my worst tradin habit? What’s my best?
Where do you ail mos consisenly? Is here somehing you can do abou ha? Who have you old? Wha is he consequence o no doing somehing abou your wors rading habi righ now? Where will you be as a rader in 12 monhs, i you do nohing abou i? Will you sill be rading in ve years i your habi becomes worse? Wha would happen i you amplied your bes rading habi? Wha would occur? Wha i you became even more skilled a ha one hing? Perhaps i is one paricular kind o rade seup: You jus seem o do i beter han anyhing else. Bu you don’ ocus on i exclusively because i doesn’ produce “enough” rade seups. Ta’s bullocks! Wha would happen in ve years i you oally ocused on wha you did bes and you le everyhing else go?
ry i.
ACKNOWLEDGEMENTS
Tank you:
o Roger Harmon for being my Wallaby trade friend from the beginning, o Jason for editing this book, o Wes for organizing my entire life, o Joe for designing this book, o Jennifer for inspiring me,
And thank you for reading.
View more...
Comments
