Apple reminds us of Doji at Top

Apple today reminded again why Doji at the top should be watched very carefully.

This signal has more than 400 years of history. Japanese rice traders developed the system 

period.  In mid 1700,  Kosaku Kato (1716 - 1803) was born in the city of Sakata, now Tamagata

His mastery of the rice market price movements was popularized in verses such as: "When it shines in Sakata (the growing region) it’s cloudy in Dojima."  English translation means when there is good weather in Sakata, the prices fall on the Dojima exchange. "And in Edo (Tokyo), it rains." Rice prices plummet there.

Apple yesterday wrote a new all time highs at 103.74 and formed a doji at the top signal. It was not a red candle doji but was a doji and if one had watched it carefully, the way Apple opened today would have stopped them out. Apple opened at 103.2 today and then within few minutes started selling off.
I had my stops at 102.49 and I was immediately taken out. That trade triggering me woke me up as I was busy watching other stocks gapping higher up.

Once again Doji at the top should not be ignored.

http://bigbullandbigbear.blogspot.com/2011/05/doji-at-top-pattern-to-burn-in-your.html

2014 Summer Mentorship Program

I will be starting 2014 Summer Mentorship Program on June 15.

Please e-mail me on marketing1977@gmail.com  with subject line "2014 Summer Mentorship Application".

The course is free of cost. 

Risk of Ruin

This material is copied from my premium service: bigbullbigbear.net.

Understanding Risk Of Ruin.

Lot of times, we try to be successful and try to hit a home run and we get out or miss out on smaller opportunity and end up losing. Now logically if you turn the scenario on its head, and start thinking that we want to lose everything, we might end up hitting the home run.

Perry Kauffman developed this theory of Risk of Ruin exactly on these principles.

The risk or ruin (also known as the probability of ruin) is the probability that you will lose sufficient trading capital that you deem it impossible or unwise to continue trading. This point does not need to be bankruptcy (it often is) but is where you throw in the trading towel and close your trading account.

What is the PROBABILITY?

If you pursue any occupation or endeavor for long enough you may witness events that are once-in-a-lifetime or at least very rare events. A bird watcher, may for example, rarely if ever see an Spoon-billed Sandpipers on Michigan Lake. However, the chances of him/her seeing an Spoon-billed Sandpipers increase the more bird watching he/she does.

Trading is no different. If you pursue a trading career for long enough and you execute a sufficiently large number of trades you will most likely see long losing and wining periods. The longer you expose yourself to trading the more likely you are to see those extreme events.

Perry Kauffman considers the following 2 premises:

• In real trading, once profits accumulate, the chance of ruin decreases. The greatest risk is at the beginning.
• If we plan to withdraw profits, thereby maintaining the same relative commitment to the market then the risk of ruin must be greater than if we accumulate profits and keep the trading position the same.

Kaufman gives us the following formula for calculating the risk of ruin:

risk_of_ruin = ((1 – Edge)/(1 + Edge)) ^ Capital_Units

Edge is the probability of a win.

We can see that the mechanics of the formula are such that the larger the value of Edge the lower will be the risk of ruin. This is also intuitively logical because the greater your edge in any strategy the more likely you will have more winning trades. Also, the greater the number of capital units employed the lower the risk of ruin. Again this should be obvious: The smaller the amount you risk for any one trade relative to your capital base the lower the risk of ruin.

 Risk greatest at the beginning why?

As mentioned above, the risk of ruin is greatest at the beginning.

One reason is because your capital base is smallest at this point and if you immediately hit a string of losses it will take a smaller string of losses to wipe out your account

There is another reason why risk might be greatest at the beginning. This may be because of lack of experience. An experienced trader who has survived for a long time will have overcome losing habits that a new trader may still have. These losses may be from simple things such as not operating the trading platform correctly to more complex discretionary decisions about when to override the system.

Conclusion

The risk of ruin is greatest at the beginning. The risk of ruin also increases the longer your remain a trader because the risk of experiencing a series of losses increases.

When one hits a losing streak, or when market is not behaving the correct way,  by scaling to smaller trade sizes as the portfolio is reduced one lowers the risk of ruin and improve the survival rate.

Hence for new traders, they should really think about how much they want to risk, once they start making a bit, then increase the risk appropriately. Starting with 0.5% of total portfolio risk and then increasing it by 0.10%  is a very prudent way to start.

Doji at Top - Revisted Follow through.

Couple days ago I posted DOJI AT TOP - Revisited and and one of the chart I was planning to attack. 

The attack is now bearing fruits. 

This type of pattern happens over and over again and if you attack these super movers with this defined strategy, then it can bear real nice fruits for your overall account.

Doji at TOP - Revisted.

Back in 2011 I had written this article about DOJI at the TOP and what it means for parabolic movers.

http://bigbullandbigbear.blogspot.com/2011/05/doji-at-top-pattern-to-burn-in-your.html

We have Biotech sector going parabolic after the buyout of  Intercept Pharma where the stock gapped up massive $250 dollars on the day.

Due the this there has been a massive buying in all type of biotech stocks which has made the biotech ETF surge exponentially higher.

Looking more closely to the chart, we do have a Doji at the top followed by a red doji/ / hammer type of candle. ( I would have preferred a Red candle DOJI  instead of a green one but nevertheless this setup here offers a good risk reward.

The critical level here would be 250 area. if that gets taken out then this ETF can easily tank down to 200 levels.

There are multiple ways to play the short.

One simple way would be to short the ETF with the Buy Stop a the top the that DOJI candle.

Other ways to play them would be with options.
My friend Steve Place has a good way to explaining this on his blog

http://investingwithoptions.com/blog/2013/12/30/the-foolproof-way-to-find-a-blowoff-top-using-options/

Dragon Scan Candidates for Jan 9, 2014

Dragon Scan Candidates

This scan is to quickly find the stocks that have this Wedge pattern or Dragon pattern

I am putting this in ThinkorSwim for the folks who cannot access TC2000 or Telechart. 

First Custom Scan: Price Linear Regression 44 days

#Big Bull and Big Bear LLC

def MiddleLR = InertiaAll(close, 44);
plot buy1 = middleLR > middleLR[10];


Second Custom Scan: Volume Linear Regression 10 days
#Big Bull and Big Bear LLC

def MiddleLRVol = InertiaAll(volume, 10);
plot volbuy =middleLRvol < middleLRvol[5];


Third Custom Scan: Top Band Linear Regression 10 days
#Big Bull and Big Bear LLC

def price = 1.01*High;
def TopbandLR = InertiaAll(price, 10);
plot toplr =topbandLR < topbandLR[5];


Fourth Custom Scan: Lower Band Linear Regression 10 days

#Big Bull and Big Bear LLC
def price2 = 0.99*Low;
def LowerbandLR = InertiaAll(price2, 10);
plot lowerlr =lowerbandLR > lowerbandLR[5];

I run this scan on the stocks that show on a very good tool called Bluefin developed by a friend Dan Cummiskey atPatient Fisherman.

As Dan has pointed out multiple times, one should to be in the best performing stocks in the market. In Bluefin, Dan has filtered out the strongest stocks by various methods. 

Now one need to go through this entire list and using elbow grease, need to identify trade able pattern and subscribe to alerts. 

What is your Edge ?

WHAT’S AN EDGE? 

In a probabilistic arena such as the markets with random outcomes, an edge is defined as a higher probability of one outcome occurring over another. Edge also represents some type of advantage over time.

There are various type of edges

1) Education and experience give an advantage or edge

2) There is the information and experience edge.

3). Speed  - Robotic computers located very close to exchanges. They try to extract the technological edges.

There are actually many types of edge in the market, but we are going to focus on two edges that are there are embedded in every above edge or are very structural to market.

First one is Win-rate edge and second one is Winning Dollars edge,

Win-rate: This is the % of favorable output over a series of trades.

Most of the Casinos and professional traders use the 50 percent threshold as a baseline to assess their win rate, because a 50 percent win-rate equals probability of flipping a coin, A win rate less than 50 percent indicates a negative edge while a win rate above 50 percent represents a positive edge.

In the roulette wheel in Casion, the House holds the Win-rate edge over the gamblers 52.7% vs 47.3%,  There are 18 red slots and there are 18 black slots and there are two green slots 0 and 00. These two green slots are always for the Casino. So if you bet on say Red slots then your probability is 18/(18+18+2) i.e 18/38  = 47.3 %  So the win rate of casino is 52.7%.

For a new trader, the methods he selects for entry and exit of stocks /etfs should give him more than 50% win-rate to start with. With that said many professionals traders, have win-rate of less of 50%.

many professional traders post win rates les s than 50 percent, which

means they lose money on a larger number of trades than they win. These professional traders understand the importance of edge over time and how the win-rate edge is just one component in their trading plan.

Winning Dollar Edge

Professionals traders give higher importance to the winning dollars edge. Winning dollars edge refers specifically to the reward-to-risk relationship in dollar or point terms of a setup. For example, lot of traders try to seek 2 to 1 or 3 to 1 reward to risk ratio. This means that every $1 risked, the traders is seeking $3 in profits.  So with a win-rate of 50%, this trader over 10 trades would make $15 (5 winning trades x $3) and would lose $5 (5 losing trades x $1) and would make $10.

A combination of these two edges would give you your expectancy numbers. Expectancy number is average amount of dollars you expect to generate per trade.

Expectancy =  (Average Winning dollars x Win-rate)  - (Avg losing dollars * (1- Win-rate))

Once you understand this then you have to work systematically towards either increasing your win-rate edge or your winning dollars.edge,

Best ETfs of 2013