The Technical Trader - JohnPiper.info

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In Our 26th Year!

The Features

10th July 2012

1. Introduction

FTSE falling back . . . . . . . . . . . . . . . . . . . . . . . . . 2/3 The Dow ditto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 The DAX sees clear reversal pattern . . . . . . . 4 Nikkei Dow rallies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 T-Bond flat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4/5 GOLD still in that triangle . . . . . . . . . . . . . . . . . . . 5 GBP/EUR sees new highs, as expected . . . . . 5 New Book - Wealth Creation - concluded . 6/7

The Month Ahead

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I am going to say something about Money Management (MM) in this piece. I believe MM is the most important aspect of trading yet it is possibly the most neglected. Today I want to give you an idea that might help – this idea is simple yet effective and has the potential to make a big difference to your results. So here goes: IDEA: If you are going to live off your trading then you need to build up to trading in size. £2 per point or £10 per point is not going to do it, although £10 per point over multiple positions can work. This idea is simply to increase your trading size on success following a very simple formula. The formula is that you trade in £s per point equal to the number of £000’s in your trading account. You don’t need to start with large sum (even £200 may be sufficient) but let’s say you start with £1000 in your account – at that point you trade at £1 per point. This is about the



Trading Summary LONG

FTSE 100 DOW/NASDAQ

DOWN? DOWN?

DAX DOWN? US T-BONDS UP NIKKEI DOW DOWN GOLD UP £/EUR UP? * Trend change maybe imminent

TREND MEDIUM DOWN? DOWN?

SHORT (TRADING) DOWN DOWN

DOWN? UP UP? UP UP ?May be corrective action

DOWN FLAT UP? FLAT? UP

right level and if we assume you use stop points between 20 and 40 points the risk equates to 2% - 4% of your trading capital – your MM is keeping you safe! Too tame I hear some of you say! I disagree. Consider – OK it may take some weeks to get from £1000 to £2000 (and you are allowed some leeway by adding to positions, trading multiple positions and doubling up when something looks particularly good) but once you get to £2000 you have half the battle to get to £3000 and after that the £000’s get easier and easier. So you can build your stakes more and more quickly. PLUS each level is like a graduation – you have proved yourself and each time go onto to greater things, literally! Occasionally you may want to take some cash out of the account and go back a few steps. If you start below £1000 you may simply choose to be more aggressive with your MM or you may adopt a

TRADING SYSTEM 50% SHORT 50% SHORT 50%SHORT 50% SHORT LONG 100% LONG LONG - tight stop

more cautious approach. I send this to the members of my VIDEO COURSE a few weeks back and one of them replied to say he had been doing this for some time – an example of great minds thinking alike? He also added some practical comments one of which was to withdraw a percentage of each winning trade as it helps pay the bills! More importantly it makes it real money and reinforces that fact. 2 FTSE 100 So far the news coming from the EuroZone has been vaguely encouraging but wave patterns are not. In fact a decision point is very close and for two reasons. First we now have A-B-C rallies off recent lows and those C waves cannot go too much further and remains corrective. Secondly there is yet another interesting triangle in place (and thanks to GN for pointing this out) and I think this triangle may well prove decisive in action over coming months – see Chart *1. I shall

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be watching 5400 and 5850 carefully as we go forwards – please note these level change as time goes by. I also want to mention an article I read in the International Herald Tribune whilst in Dubai concerning Iceland. Iceland hit a deep economic crisis four years ago and they handled this somewhat differently – they let three of their major banks fail! Banks are the bedrock of a financial system and by taking this action they ensured that a decaying and possibly corrupt base was swept away. That is much better for future growth. If we had done the same in the UK who knows where we may be now. OK the crisis we saw back in 2007/2008 would have been far worse, maybe unacceptably worse, but it is only when we eliminate the debt overhang that we can start to build. Iceland are not out of the woods and I’m not saying what worked

for them would work for us but what is happening now is not working either! FTSE is also falling back. We remain 50% short here via the ETF and we are also 50% long of the VIX. TRADING TREND. TT is DOWN 3. The DOW The Dow has also seen a clear reversal pattern - see chart *2 – albeit shortterm than the DAX. The top made is also “unorthodox” as marked on the chart. Plus the corrective rally is less clearly formed and does allow for more upside before we fall back. Nevertheless the pattern here remains valid. We are now 50% short of the NASDAQ via the ETF Proshares Trust Ultrashort QQQ. I will be updating this as we go forwards in my daily reports. TRADING TREND. TT is DOWN 3

as “obscure” but it is clear that 7000 is the key support level. In the shorter-term we also have an A-B-C rally here following the low at 8238 (4 June) but it is not as clearly corrective as on the DAX. Plus those clear positives remain, particularly the fact that the 7000 level was seen in Q3 2008 after a 20-year bear market. That does not mean that 7000 may not crack like a nut but it does mean that this decline may be the final part of a B wave. TRADING TREND. TT is UP?

4. The DAX The DAX continues to look highly negative and Chart *3 shows the picture. We have seen a big five down from May 2011 to September 2011 (key support established around 5000). Then an A-B-C rally into March 2012 and now five waves down into the low at 5914 on 5th June (key support 5900/6000). This pattern allows for sharp decline anytime now! We are now 50% short of the DAX via the ETF ETFS Fund Company Plc DAX 2X Short Fund Shares EUR (GBP). TRADING TREND. TT is DOWN

6. US T-Bond

Again no overall change on the T-Bonds which remains positive for now. Our ETF is based on shorter term maturities and continues to out-

5. NIKKEI DOW

As I said last month in the longerterm the Nikkei Dow has a wave pattern which can be best described 4

perform the longer term bonds. We are down, but not by too much (c. 8% at this point), and the price action can be viewed encouragingly. I plan to stick our 50% short of these Bonds via the recommended ETF DB X-Trackers II IBOXX Short USD Treasuries Tr Index 1C (XUTS) for now. TRADING TREND. TT is FLAT

current positions (although not as much as a strong rally starting now!). But be on the lookout for contrary action. We remain 100% long of Gold via the ETF PHAU, entering first on Friday 30th December when Gold was around $1560. TRADING TREND. TT is FLAT? 8. FOREX

GBP/USD is still flirting with the lower parameter of that multi-year triangle but no resolution just yet. GBP/EUR has made new highs as expected (the interest rate cut did not hurt!). But I still expect more upside to come. TRADING TREND. TT on GBP/ EUR is UP

7. GOLD

Gold is still betwixt and between with another triangle in play – see Chart *4. As traders we need to treat triangles with respect but my view is that we may see a false break to the downside and then a true breakout to the upside. This would fit in with the trend into the triangle (which was up) and would suit our 5

Q. Will you be looking at Index Options on the FTSE as an alternative way of trading? A. For Mark’s service Options would entail too much risk

WEALTH CREATION concluded Q. Would you ever trade penny shares as CFDs or are they too risky? A. Penny shares are very risky by nature. The company can be here today and gone tomorrow so I would not recommend leveraging on this type of investment Q. I originally subscribed to John Piper’s Profit Before Work (PBW aka PDS), and whilst it initially worked the 8am pattern for the FTSE changed. Isn’t it true that most systems offered tend to have the same results? A. If you buy a good system from a reputable trader and the track record is proven, a negative result is usually down to not following the system 100% or having unrealistic expectations . By unrealistic expectations I mean assuming a system will have no drawdown. The majority of system users abandon a system if its gives 3 loses in a row and then continually jump ship trying to find the perfect system. If a system has a 70% hit rate and the risk/reward ratio makes sense it’s important to understand you will be subject to 30% loses and these could come in at any time. However the long term profits will take care of themselves. There are a number of long-term users of PBW who make consistent profits. On a side note always beware of systems which claim to have a hit rate of 85% plus. Usually the risk far outweighs the reward and you will eventually lose your pot. Sadly there are also many scams on the internet today

Q. What are the key setups you are looking for when trading binaries? A. Tunnels are linked with volatility and news releases; One touches are linked with general analysis; Up/down binaries are linked with key intraday reversals Q. I do not know what you plan for the Webinars, but I would welcome more clarification on reading charts, and particularly in currency trading. A. Sorry I need more information on what aspect of chart reading you require. Q. I would like to achieve £5k-20k or more per month trading. Firstly is this possible? Secondly can you show me the path please? A. I suspect a part of this question is missing. I suspect you mean how do I make £5k - £20k pm starting with £1000? Answer – you can’t, well not without taking huge risks and having unbelievable luck. Please refer to the earlier questions on this topic. Assuming a 20% return pa you would need starting capital of between £300k - £1.2m. WEBINAR QUESTIONS – we also answered the following questions in Webinar One… however brief answers are also below on most of these… 6

Q. What are the main differences in strategy between intraday and longer term trading? A. The main difference is in the stop – preferably no stop. You can achieve this by using binary bets with BOM or by using ETFs (EXCHANGE TRADED FUNDS) – I am writing about these in my newsletter a fair bit at present. But certainly if you do use a stop it has to be kept a LOT wider if you are to stay with longer term positions.

before coming good again? A. Every system will phase in and phase out, good systems phase in most of the time. Q. I always struggle with the right Stop distance! Too close and I get stopped out of a good longer term position and too far risks getting a big loss when the position does not go as planned. What are you criteria when assessing?

Q. How do you decide which waves to count and which to ignore in coming to your count decisions? Or is it all subjective? A. I cannot really answer this question in full in this forum as it would take a book. But the third wave is often the longest and that can be a good place to start – but many patterns are crystal clear – see examples in my books THE WAY TO TRADE (especially the 1987 Crash) and BINARY TRADING. It is when the pattern is not clear that it can get complex but I often simply dismiss the theory at that point.

Q. “How long can the USA continue to owe the world so much money and still be the reserve currency?” The Crash that follows their demise is going to affect all of us and the markets too. A. It is a bizarre situation and any rational man would probably have said it would end long before we reached this point, yet here we are. The same goes for the debt crisis. As I discuss in this issue we may now be seeing key turning points but really we do not know. All I do know is that the longer it takes to bite the bullet the longer until we can start to build on firm foundations again.

Q. When was the moment you felt Q. How can I trust the markets when 3 your trading system turn the corner separate endowments have lost money and you were making consistently good trading decisions. after over 20 years? A. You cannot and should never have A. At each stage in the testing/trading done so in the first place. I discuss this process. fully in the video clip on WEBINAR ONE – see above. Q. Every time I think I have found a trading system that works for a few months, I then find it stops working. Is this typical or should a mechanical statistical system that genuinely works only suffer small periods of drawdown

Next month’s TTT is due out on the first or second Friday next month.

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apitalism won the war and now C it is globalising, but what next? Globalisation means profit and dumbing

down, and nationalism is about cultural resistance to that.” Irvine Welsh

The Technical Trader is published once a month (plus “weekly” video clips - at least 45 pa) by t1ps.com, an FSA regulated company based at 3rd Floor, 3 London Wall Buildings, London, EC2M 5SY. Subscription rates £245(UK), $375(USA), and $415/£285 (rest of world). Make cheques payable to the technical trader, telephone payment accepted by Visa, MasterCard or Switch on 01306 882579. All information and advice is given in good faith but without legal responsibility. We are unable to guarantee the accuracy of the information published despite the care taken in preparation. We welcome all enquiries. We can also supply details of the computer software we use on request. Editor-in-Chief: JOHN R. S. PIPER FCA ATII MSTA HbT. The Technical Trader is copyright (© John Piper 2012) and may not be reproduced without written permission. All editorial enquiries to The Technical Trader, Sunflowers, Martineau Drive, Dorking Surrey, RH4 2PN; Tel: 07747 030772 E-Mail Address: [email protected] Email at [email protected] for my free 101 part E-course. All subscribers are advised that trading in any capital market involves the risk of serious loss - never risk more than you can afford to lose! The value of an investment may fall as well as rise; changes in rates of exchange may cause the value to fluctuate. A particular investment or investment service may not be suitable for all investors and, if in doubt, you should seek advise from your investment adviser. Past performance is not necessarily a guide to future performance. Investments carrying contingent liability incur the possibility of a total loss of all of the amount originally invested or deposited, together with any additional payments that you may be required to make. TTT offers no investment advice but rather provides an information, education and analysis service only. None of our suggestions or examples nor anything within this publication should be construed as advice to buy, sell or take any other action concerning any investment. The tips, recommendations, and suggestions given here are of necessity, general. They cannot relate to the individual circumstances of investors. Anyone considering following the recommendations contained here should seek independent advice from a Financial Services Authority authorised Stockbroker or Financial Adviser.

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