Charting time frames and the value (or lack of value) of different time frames

Charting time frames and the value (or lack of value) of different time frames

Charting periods and chart types, what works and what does not.

There is only one real time frame to work with and that is “tick” charts. Any other value is a modified perception from this raw real data.

Over the years, I have read and tested all the different theories and writings on the different time frames people use for trading. I find it amusing that traders still think there is a holy grail of time frame, and that they are “to close” to the market or a general comment is “if I look at the 15min chart it provides me with better profit or better trends etc”. All this is absolute hogwash, and all a trader is doing here is trying to model and fit a chart time-frame to suit the outcome the trader is chasing. This is a sure way to implode ones trading account.

What must be worked on is that at the end of the day a traders strategy must work on any time frame, otherwise a trader is chasing a perception and trying to create reality. This is called curve fitting.

My opinion is this. I do use various forms of tick data in various ranges of time, from 4 minute to 15minute to hourly or daily etc. However, I build my strategies and trading systems not on time- frame but rather focus only on the strategy. I can place any of my strategies on any time- frame and the results will be the same. 

That is the point. I only use time-frames to condense data and make my analysis more manageable. Do not focus on time-frames and people’s or educators perception of time frames but rather focus on creating a profitable trading system, and it will automatically work on any application of time value. Focus on what you the trader can control, and that is your strategy. Basing your strategy on time frames means you are hoping you have the correct time-frame otherwise your strategy will not work. Trading is hard enough, so why worry about that as well….. Think about it. 

Why is this? Well because a trader needs to focus on the application of their strategy and that if the price rises or falls it is only a movement in price and regardless of what time frame, that movement in price is always the same. This is why if you are going to base any strategy off any time frame the only relevant time frame is raw tick data, not second data, but trade direct live tick data that only moves when buyers meet sellers.

So if you are trading:

• ·        4 minute charts and using time by degrees, where every 4 minutes equals one degree, or

• ·        5 minute charts, or
• ·        15 minute charts, or
• ·        60 minute charts, or
• ·        4 hourly charts, or
• ·        Daily charts,
• ·        Renko Bars

Always ask yourself, would my strategy work on any time-frame or am I modelling and curve fitting to suit a time frame.

Trade your strategy do not trade the time frame.

Trading using valuation models – Warren Buffet and Net Cash formulas to value a company

Trading using valuation models – Warren Buffet and Net Cash formulas to value a company

There are various ways to value a listed company. Fortunately, there is not one exact way to measure the value; otherwise, we would all get it right all the time. These variations and opinions on the way to value a company, provides buyers and sellers in the market place.

The most important thing is not to be hung up on random uncontrollable details. A trader must use the valuation models as an instrument to sort some conformity to the chaos in the market. It must be used a guide to help select trades that are profitable.

This is where the power of random statistical probability comes into play. Using a market-scanning tool a trader can quickly find and produce a list of quality companies that are trading roughly at or below valuation. Depending on the valuation model, and how conservative a trader wants to get, will depend on the various formulas a trader wishes to use. This formula needs to be modeled to suit the trader’s criterion. Each trader has a different perspective, so do not get hung up what other people are doing concentrate on what you’re doing and the results you are generating from your fundamental analysis.

Adding probability to the fundamental formula provides a trader the added reassurance of the profit that can be generated from a trade. By adding probability, a trader can also know how much profit is available on any given trade. This is highly valuable when working out if the trade fits your risk profile and the earnings to risk factor is in the traders favor. 

The way to look at it is to ensure that the company is trading below a valuation that you would be comfortable buying it. Here are some valuation models that may help with your fundamental models;

·        Warren Buffet formula

·        Discounted Cash flow models

·        Net cash formula

·        Graham formula

·        Peter Lynch fair valuation model

·        Net Current Asset Value

These are to name a few, but will help in your accumulation of data and models. All valuations models have limitations, and should be used as a guide.

The bottom line is creating a system that you are comfortable with, and then trade it. Trade it the best way you know possible and use the required instruments that provide you the return you are looking for. We will look at various instruments in a later blog.

Remember: NEVER TRADE UNLESS YOU KNOW WHAT THE POTENTIAL EARNINGS TO LOSS RATIO IS GOING TO BE.

Stacking the odds in your favor when investing and trading

Stacking the odds in your favor when investing and trading

What do I mean by high probability trading and stacking the odds in the traders favor?

Let’s explore this.

I would quite comfortably place a trade if there were a 20% probability of making money but the return was earnings to risk factor of 20:1. Meaning for every potential drawdown or loss of $1 I have a 20% probability of making $20.

On the other hand, I also would be comfortable making a trade if there were a 95% probability of making money and the earnings to risk factor was 1:1.

The thing is every percentage that the probability goes down means that the earnings to risk factor have to increase. 

Bottom line the trader needs to be able to trade knowing that the worst-case scenario they can recoup their money and make profit if the worst-case scenario takes effect.

The use of Options can help in this case, to help reduce the risk exposure or increase the earning potential to risk factor etc. There are numerous instruments a trader can use to help mitigate or at least reduce where possible the risk, and increase the rate of return.

In my opinion, it helps to study things like the roulette wheel. I am not a gambler and have never gambled, but I did spend time studying the roulette wheel, as I figured it closely represented the traders market in general. After months of study, I managed to work out how to reduce my risk at the table and increase my return. I then applied these same theories to the market and my trading robots and systems. Imagine if you can consistently win at a negative odds table which is stacked in the houses favor, and take that to the traders market which is a zero sum game….. Imagine the increase in profits where there is substantially more opportunities.

So in short, do your math’s, work out if the opportunity and risk is costing you more than the potential return, and then test your theories on decades of historical data. Then go for it…

Fundamental or Technical Analysis

The myth continues; or should I say the sales men keep having the same verbal diarrhea

Here are my thoughts to add to the discussion

My opinion is that people are hung up, looking for the Holy Grail. I would hate to be the first to break the news but there is no grail. There is only hard work, dedication, and commitment. 

I really cannot fathom why people waste their precious time arguing about a senseless point. Both have their merits and both have their drawbacks.

An investor and trader needs to trade to make money. You need to be in a position to stack the profitable odds in your favor. If you do not or cannot create a system that provide you with a high probability of making money, based, not on opinions, but on real historical data, then you will have no chance and will lose money. It is that simple.

That is why property investing done properly is a no brainer, and in my opinion, you would need to be a real village idiot not to make money from property, but more on this in another blog…

So what do I use, well in plain English I use whatever provides me with the highest probability of making money and making the most amount of money.

This could be a combination of both or using Gann trading methods or using Warren Buffet valuation formulas or a full combination of all analysis. Who cares, as long as I can prove that the system and trading method provides me with the edge required to make money from investing in the stock market.

I do find it funny that people classify themselves as fundamental traders, or die-hard technical traders or Gann followers etc. When at the end of the day WHO cares…. Isn’t investing a commercial opportunity and one to take seriously and financially benefit from? Or am I missing something…. I view trading as an opportunity to make money, I am not here for social reasons, or to prove that xyz system is the best in the world. All I am here to prove is the increase in my bank balance. 

As a Trader that is all you should care about. Do not get hung up on what people’s opinions are and what method they trade. As long as it is a proven profitable systems and it suits your style, then all the best. I was asked the other day, if I was a technical or fundamental trader. My answer was I am a “making money trader.” Kind of through the person asking the question off, as surely, you are one or the other he went on and said. I noted I really do not care, as long as it fits my random statistical probability model and I can prove to myself that it has made money based on historical data, and provides me with a high probability of making money I will trade that system. It really is that easy. 

My question is, why would you want to be a die-hard technical or fundamental trader if you cannot make money? As Dr Phil would say: quote: “How’s that working for you”

So in short, focus on creating a system and strategy that you can prove to yourself that it will make money. Once that is proved to yourself, stick to it, stick to your plan and trade it effectively. Don't get side tracked by the nay-Sayers or other "high return" sales men. Find your system, and stick to it.