How Not To Trade The Bear

There is no trading the bear market, forget trading entirely.

You need a completely different mindset, that could not be any further from that of a daytrader’s.

To thrive in the bear, you need to learn

  • position initiation
  • location of check points
  • hedging

If you look back the last 2 posts, you already have a good idea for where to initiate holdings: as close as possible to Mr. Maroon, but a cross beyond E32, sometimes even an approach would do nicely.

I would suggest scaling in to try to obtain the best average price and your required size.

Now comes the roller coaster.

You need to have and to hold shorts accumulated and with the wave structure in mind, you sit back and wait. Wait for check point 2 and check point 3.

Once the price is comfortable at CP2, you can bring your stop loss down to the top of CP1, or alternatively you could have a counter long – hedge initiated at that level with a smart trail stop this is the bear-roller-coaster-hedge option.

Once the price gets comfortable with the CP3 zone, you can move your stop / hedge long stop to the top of CP zone 2.

Consider lightening up on your shorts in the CO zone 3 if price made it there. Scale out, just like you scaled id.

The levels are at certain displacements calculated from there is a threat of the Market Breaking away from its shadow (magenta line, white highlights)

CP1 top: Low[i]-FSize/1.5*Point-300*Point

CP2 top: Low[i]-FSize/1.5*Point-760*Point

CP3 top: Low[i]-FSize/1.5*Point-1120*Point

Each and every zone is 20 pips wide. FSize is 32 pips

Sh/As stands for Short/Add to Short (you may increase your size at these levels)

the shadow-separation line is: OverDriveCover[i]=E32[i]-FMax*Point

FMax (fluctuation maximum) is 6/5th of FSize

Where to from here? Back to the Eagle Nest of the Market Makers, Mr. Maroon himself.

Wave structure below

In conclusion, you don’t open naked longs unless price is well into CP3.

The Polar Bear

The bear appears when the Market Makers change their behaviour (polarity) from accommodating to opposing/offensive. Rather than settling for giving fills and collecting commission, vicious rabies comes over these punks.

Mr. Maroon (E67 High & Low) has never been this important

While in a regular market the breaks are operating well (see previous blog entry), mean reversions are a common place; the play accordingly is a return to market neutral, thus stretches can be defied and the hedging direction points outwards, away from the mean. This market has a fair price in mind, and shall make its way back to equilibrium.

E16, MMs can kick into the ball at half field leisurely to extend the duration of total craze.

After the paradigm / polarity shift, the Market Makers work on stretching the Market away from its means as far as possible: suddenly the trading direction becomes away from the MMs, and the hedging direction would be against a move back to the MM zone. Overall this is the fight against the normal, the neutral, the balanced, and the objective seems to be not letting the Market settle. If it seems idle, that’s the calm before the storm. Volatility becomes virtually uncapped. The only thing to stop the bear-train is running out of steam. This is when they allow the Market to fall back to reload – and occasionally change direction.

Check Point 2 is your best bet. Cover below and re-initiate 20 pips later.

A regular bear market goes on for about 6 months, so this thing is going to be here to stay for a more months, i.e. September.

I know you are curious of the wave structure…

When a Bear Loves a Market

What makes a bear market a bear market? Price dropping 25%? Utter rubbish!

What if the whole correction was 25%? You are allowed to start shorting the bottom? What about what went down while price made these numbers?

What do you need to survive in a bear market?

  1. Acknowledge the change
  2. Learn new risk management

1.

A bear market is when the market is able to separate from its own shadow: the usual safety mechanisms do not work, and the direction can be to the up side as well as the down side.

Volatility is one thing. It got a bump up by 30% since the BRExit.

Now, the daily expectation on average is 105 pips versus the 80 prior.

This does not however explain the breach of the energy bands and the occasional 300 pip days.

The telltale of the market change is when unusual stretches appearing repeatedly.

The shadow of the market is the E32 on the hourly (orange).

The white circles are highlights of the areas threatening with separating from the shadow.

What comes after this is a one way freight train. This is what the bear market makes possible.

The stretch from the mean itself in a regular market does not exceed a 4x fluctuation maximum multiplier.

On the upside this stretch recently reached a whooping 9.5!

The perforation line was added to better gauge a 4x stretch.

Mean reversion was inevitable, but the market only obeyed after the wave structure was finished to the upside. The 60-pips gap up kicked off the wave 3 of Wave 5 (think wave 3 upon seeing a large gap) only to embrace for another 150 pips rip to the upside during a normally quiet Asian session, when EUR and USD are not heavily traded.

There were these two large gaps that are visible on the 4H chart still.

2.

Risk management.

You need to start learning new terms, such as personal maximum unhedged risk.

You now know, that 100, even 300-pip range days are possible currently. If you snooze, you can very easily loose everything.

You must have enough cushion to withstand 100 pips as a surprise in general,

so for instance based on the equity and the leverage, you figure that you could afford a maximum draw down of $100 per ten 10 pips, that means you must have an additional $1000 cushion available to cover margin, and you better become a proactive hedger.

You would have to monitor for drops greater than 20% below your maximum unhedged risk in your equity margin. A ratio hedger is needed, yes, but I would also recommend to learn the roll out system.

The roll-out system would come with IH (Indefinite Hedge) levels based on the separation of the market from its own shadow: to catch the freight train.

You must take on a hedge at these IH levels and then monitor for the activity around the Check Point levels. In general, you want to see the market surpass a check point and then come back through it: just trail you stop and monitor for changes every hour, and once the trail was hit, place a roll-out hedge for more atrocities 20 pips beyond your disconnection.

More cash flow and more margin can always help.

I have made these routines, yes. Did you want to ask something?

The bear works in both directions, in fact the bear does not even care which way is down.

The bear cares about 1 thing only. Causing maximum amount of damage.

Tips & Tricks – Mean Rev.

Mean Reversion Target – 30 Min (2-3 days typically)

iHi4[i]=iMA(NULL,0,414,0,MODE_EMA, PRICE_HIGH,i);
iLo4[i]=iMA(NULL,0,414,0,MODE_EMA, PRICE_LOW,i);

deletetxt1("Froese");

for (i = lookback ; i >= 0; i--) {
if (iHigh(symbol,0,i+30)==iHigh(symbol,0,iHighest(symbol,0,MODE_HIGH,230,i))) {
             ObjectCreate("Froese"+i,OBJ_TEXT, 0, Time[i], High[i+30]-40*Point);
             ObjectSetText("Froese"+i, "Mean Reversion Target: "+DoubleToString(NormalizeDouble(iLo4[i+30],4),4), 23, "Arial Black", clrDarkGreen);
             
         }

if (iLow(symbol,0,i+30)==iLow(symbol,0,iLowest(symbol,0,MODE_LOW,230,i))) {
             ObjectCreate("Froese"+i,OBJ_TEXT, 0, Time[i], Low[i+30]+40*Point);
             ObjectSetText("Froese"+i, "Mean Reversion Target: "+DoubleToString(NormalizeDouble(iHi4[i+30],4),4), 23, "Arial Black", clrDarkGreen);
             
         }  
}
   void deletetxt1(string text){
   for(int iObj=ObjectsTotal()-1; iObj >= 0; iObj--){
      string   on = ObjectName(iObj);
      if(StringFind(on, text) == 0)  ObjectDelete(on);
}  }

Nick’s Lessons #5

Out of all of these signals below, which do you think is the most reliable for guaranteeing a successful trade?

If you picked the diagonal purple lines on the RSI2, you picked well.

The best entry is a continuation pullback or liquidity pullback.

These are the moves that do not manage to achieve the total range or the full lambda.

The emphasis is on reliability. Getting 25-30 pips at the very least is a considerable advantage, so consider using it.

Nick’s Lessons #4

Long term Stochastics would never go away, the Comfort Levels are always going to remain relevant.

Clearly, this was a V bottom

Key sentences: fresh overbought / oversold = toxic

Once the market leaves the overbought / oversold field, it would target the Median (50%) first, then it may proceed to the other extreme to tackle the order-dense field.

Clearly, the market consolidated above the Median (50%+)

I call the 85-95% zone the upper, the 5%-15% the lower reversal zone.

Above 95% the odds are a new high, below 85% a reversal may have transpired.

Where would price be at close today?

most likely rather close to the overbought neckline, saying: on the fence
just keep guessing, people!

In no man’s land I’m no man’s friend.

Until price is staying above the 1.1287 ex-resistance, more upside is possible. If it falls, this was a top. Where would you expect price to proceed to from here, having read the answer above?

Embedding is 3 consecutive daily closes in the overbought / oversold field.

Saving is when one day closes outside, but they put it back inside on the next.

How is you comfort level?