Breakthrough Trading E-Book

Leon Wilson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 462

Veröffentlichungsjahr: 2012

Beschreibung

Leon Wilson has been trading shares for a living for 11 years. He is a firm believer that to succeed in any business it is necessary to always be looking for a better way of doing things. Part of his trading approach is to question conventional wisdom and push the boundaries of accepted technical analysis theory. The contents of this fascinating new book reveal what Wilson believes to be a major breakthrough in technical analysis. He tests the edge that this new charting analysis can offer any serious trader -- and the results are astounding. In what he believes to be a world-first, Wilson has succeeded in adapting common and popular indicators (including volume) to price action. Instead of viewing a non-price based indicator such as the relative strength indicator in a separate box at the bottom of the chart, Wilson explains how it can be plotted as a channel on price action -- creating the Wilson channel. Moving beyond default settings and combining the channels with various entry and exit strategies, Breakthrough Trading can dramatically improve your yearly returns.

Leseprobe

Contents

Introduction

Chapter 1: Appraising Theory

Outlining the Testing Program

Simulation Example

Overview of Ground Rules for Testing

Selective Testing

Chapter 2: Index Regression

What’s Relative?

The Evolutionary Process: Down from the Trees

A Concept is Born: Adaptation of Indexes to Price Action

Creating the Channels

Theoretical ways to Trade Price Action Using Channels

Establishing a Benchmark – Relative Price Channel

Conclusions to Draw at this Early Stage

Coding for Chapter 2

Chapter 3: The Emergence of Relative Adaptive Analysis

Converting an Open Oscillator into a Range-bound Index

Internal Strength Index

Applying the ISI to Price Action

Establishing a Benchmark – Internal Strength Channel

Coding for Chapter 3

Chapter 4: The Final Frontier (Well, Almost)

Directional Movement

Establishing the Benchmark

Conclusions so Far

Coding for Chapter 4

Chapter 5: All Things Relative

Relative Strength Comparison

Comparative Strength Index

Comparative Strength Channel

Establishing a Benchmark

Coding for Chapter 5

Chapter 6: Mingle with the Crowd

Volume Bias Index

Volume Bias Channel

Establishing a Benchmark

The End of the Benchmarks

Coding for Chapter 6

Chapter 7: Compatibility

Relative Relationships −14 Periods

Stand-alone Confirmation

Beyond the Benchmark – the Relative Price Channel at 34 Periods

Beyond the Benchmark – Internal Strength Channel at 34 Periods

Beyond the Benchmark — Directional Movement Channel at 34 Periods

Conclusions So Far

Beyond the Benchmark – Volume Bias Channel at 34 Periods

Relative Analysis and Compatibility

Chapter 8: Confirmation

Channels Combined with Initial Highs

Initial Highs

Establishing a Benchmark

Beyond the Benchmark — Adding Confirmation

Beyond the Benchmark — 55-period Relative Channel as Confirmation

The End Result

Using the Lessons so Far

Initial High and Daily Comparative Strength Channel

Initial High and Weekly Comparative Strength Channel

Coding for Chapter 8

Chapter 9: Bilateral Relationships

Crossing the Neutral Zone — Bullish

Long-Term Bullish Behaviour

Crossing the Neutral Zone — Bearish

Understanding Complex Behaviour

Patterns

Chapter 10: Relative Trailing Stops – Part One

Relative Trailing Stops

Choosing an Effective Trailing Stop

Initial High/Mean Close Trailing Stop Benchmark — Daily

ATR Trailing Stop — Daily

Relative Percentage Trailing Stop — Daily

Bear Range Trailing Stop — Daily

Arbitrary Percentage Stop – Daily

Conclusion – Daily

Bear Range Trailing Stop – Personal Application

Chapter 11: Relative Stops – Part Two

Trailing Stops on Weekly

Mean Close Trailing Stop Benchmark – Weekly

ATR Trailing Stop – Weekly

Relative Percentage Trailing Stop – Weekly

Bear Range Stop – Weekly

10 Per Cent Trailing Stop – Weekly

Summaries of Results

Conclusions

Chapter 12: Trailingstops and Price Channels

Relative Price Channel and ATR Trailing Stop

A Close Below the Exit Signal

Overbought Exit on Sustainable Price Action

Overbought Exit on Unsustainable Price Action

Further Research

Coding for Chapters 10 to 12

Chapter 13: Taking the Next Step

Index

First published 2006 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Offices also in Sydney and Melbourne

Typeset in Adobe Garamond 12/14.4 pt

© Leon Wilson 2006

The moral rights of the author have been asserted

National Library of Australia

Cataloguing-in-Publication data:

Wilson, Leon, 1963-.

Breakthrough trading: revolutionary thinking in relative analysis.

Includes index.

ISBN 0 7314 04424.

1. Stockholders - Australia. 2. Stock exchanges - Australia. 3. Investments - Australia.

I. Title.

332.63220994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

COver design by Rob Cowpe

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it cOvers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

Note

I have no formal business relationship with Compuvision Pty Ltd, the developers of TradeSim, nor do I receive any form of payment or commissions from Compuvision for mentioning TradeSim, either directly or indirectly. As a private trader I mention those programs that I find of benefit in real time. The TradeSim product produced by US Company Trade Lab Strategies is not the same product as used by me for research and development purposes or discussed throughout this book. Readers interested in evaluating TradeSim as discussed here and determining whether it is appropriate for their trading needs should log onto Compuvision’s website for further details <www.compuvision.com.au>.

Acknowledgements

Before I start, a special thank you must go to my beloved wife, Louise, for being there as I compiled this latest book. Her unquestioning help and ongoing support are priceless, as they allow for projects such as this book to materialise. Without Louise there would be no book and trading would be inherently more difficult.

Often those behind the scenes receive little or no acknowledgement for their input so, while I may not name you personally, you know who you are. A sincere thank you to those people who have contributed to making this book happen.

John Hay happened to be just the best and most loyal mate that anyone could ever wish to have and I looked upon him as my brother. His ability to Overcome adversity which the majority of us would be unable to even comprehend is an endless source of inspiration. Couple this with a most mischievous sense of humour and life was never dull where John Boy was involved. The two people with whom I was closest are not here today; however, this is not so much sad as concerning. I’m sure that John now sits with my brother Ross, plotting some devious scheme in order to derail my well-meant plans — which they will find most humorous at my expense. Is it too late to apologise for all my practical jokes?

Something to think about

Today we are so busy making a living that we forget that it is a privilege to live. Think of where we originated, the odds of it happening and, ultimately, the odds of survival today. Take the time to smell the roses along the road of life and to enjoy each day as it unfolds — after all, we trade to live, not live to trade.

Life unfolds with each rising of the sun; assumption leads us to believe that we will be here tomorrow to see it

– Leon Wilson.

Introduction

Trading is a difficult occupation that is beyond the grasp of most, simply because they lack the willingness to serve an apprenticeship — usually fuelled by the inability to listen to others (a fault normally spelt ‘ego’). I have always argued that traders all pay for their education when it comes to trading — whether they like it or not. You can either sign up for a course offered by institutions such as ACOFE (Australian College of Financial Education) and others, or tackle the market head-on as I did. In my own defence, courses were non-existent when I started out, so my options were limited. Entering the market with the belief that you are pretty shrewd when it comes to buying and selling while profiting in the process means you have set yourself on a course for disaster, because this is not a familiar world. Any similarities to past experiences of buying and selling are strictly limited to the surface — the world underneath remains forever foreign to the majority.

The belief that trading is easy stems from people’s everyday actions when buying and selling unwanted items for a few dollars. True story. My mate had an old lawnmower that was worth absolutely nothing to the average person; however, he managed to sell it for $70. I called in one Sunday afternoon for a barbecue and he proudly told me how he managed to sell that dreadful old mower for $70 (which in turn he wisely invested in two cartons of beer), when he would have been happy with $20. He viewed this as a $50 profit.

Many people carry the same mentality into the market, whereby they believe that the ability to sell an old fridge that is worth basically nothing for a few dollars more than it is really worth translates into the ability to sell shares successfully. Nothing could be further from the truth. The truth is that my mate accepted a $400 loss rather than $450. When most people sell second-hand items, they forget that the sale price is discounted to the original purchase price. The new price of the mower was $470 not $20, so no profit ever existed — my mate merely reduced the impact of the loss by selling at a slightly better price. What the majority fail to realise when trading is that they always buy at a new price and then must sell at an even higher price than the initial cost in order to profit.

In other words, they have to set a new benchmark high selling price. This is often unkindly referred to as the ‘greater fool theory’ — that is, there’s a greater fool than me. If people traded mowers instead of shares, in order to make a profit, my mate would have been required to sell the mower at more than the initial purchase price of $470. In order to actually generate $50 profit, the sale price would have to have been $520. Unfortunately, the concept of buying at a new price and selling at an even higher price escapes the majority. The trick is successfully identifying the ‘greatest fools of all’ — that is, those who are buying at the top of the market. I aim to address the common problems associated with identifying mature and unsustainable price action throughout this book.

The discussions in this book are directed toward the position trader, using a relatively conservative mindset; however, the concept that I have developed can be satisfactorily applied to literally all trading time frames. The application of this concept is potentially so vast and its impact so significant that, once it is fully understood, it may cause many people to reassess how they trade from a number of perspectives. The application of this technique is potentially so diverse that it is impossible for me to cOver it in exhaustive detail here. With this in mind, my approach has been directed more toward the introduction of the concept rather than in-depth specifics involving relative analysis and its adaptation to price action. If I can explain to you the concept of relative adaptive analysis successfully, you have the building blocks for ongoing personal development.

The learning curve usually develops in small steps, with many traders not realising the evolutionary process in which they participate until one day they sit back and think about issues with an understanding that was previously lacking. While the bulk of progress is usually subtle, occasionally some of us experience a monumental leap in application — and this is what this book is about.

Some will ask, ‘Why share something potentially so significant?’ My response is, ‘Why not?’ Those people who ask this sort of question still believe that the answer to successful trading lies solely within one indicator, or that there is a single correct solution. If this is your thought process, you are probably not ready for this book. The indicator is only one piece of a much larger process and to think along these lines reflects a level of trading immaturity. Some traders consider that their personal indicator is so super special that they dare not share the coding, yet if they took the time to look in the indicator menu on programs such as MetaStock and BullCharts, there is a distinct possibility that they will find something comparable reasonably quickly.

Mature and robust trading evolves in unison with the progression of the successful trader’s understanding of his or her environment. Successful traders thrive on change and welcome the presence of a constant challenge, while others are happy to trade using proven techniques, accepting time-honoured practice at face value. As you will discOver by the end of this book, I am not one of the latter group of traders. I constantly probe the boundaries of technical analysis and question what I have been told from a practical perspective, regardless of who the source may be, and refuse to accept anything at face value until I am satisfied that what I am told is correct or I can disprove the concept relative to my own approach and understanding.

While many inexperienced traders chase that one illusive indicator that will give them the definitive answer they seek, they fail to study trend development. I attempt to convey the concept and value of learning price action as a primary part of trading survival; however, very few seem willing to listen. Why? I suspect that it does not accommodate the ‘must have now’ mentality that has become so entrenched in our society, nor does it offer a single definitive solution or provide the level of certainty they seek. The majority are prepared to learn how to trade as long as they have it mastered by this afternoon and the process is in black and white. When I or other seasoned traders are unable to accomplish this, we are looked upon as falling short of being useful or, worse still, deliberately being unhelpful. We are viewed as being reluctant to share the real secrets. Never for one moment is it considered that the expectations may be unrealistic.

Indicators in their classic format have always been a bone of contention with me. The majority of indicators when applied at their default values on a daily time frame are basically useless. As I have repeatedly suggested to my subscribers, indicators on daily are primarily a confidence tool rather than an instrument for confirmation, and repeated testing tends to bear this out. However, I need to clarify one point when it comes to indicators — it’s not the concept of an indicator that concerns me, but rather the method of application.

For years traders have plotted indicators on the bottom of the charts in a separate window using 14 periods, and this has been done without question. From this they endeavour to draw a conclusion relative to trend development, assuming that the indicator at the bottom of the chart is sufficiently reflective of trend development to enable an enhanced decision through its application. Why hasn’t someone taken indicators and adapted them to price action, so that an indicator such as the relative strength index has a monetary value rather then a percentage value? Wouldn’t it be better to show Overbought regions on trend development rather than in a separate pane? I had all of these questions and no answers. Gradually Over time I worked out how to convert the relative strength index back to a dollar value. I always considered that this was a distinct possibility as the bulk of indicators originate from price action in the first place. If the indicator commences with a monetary value, usually the closing price, it was merely a process of converting the percentage value back to its original format without undermining the integrity of the indicator.

I have commenced with the adaptation of the relative strength index to price action for no other reason than it’s probably the most widely used indicator in existence today. In chapter 3, I will continue with the internal strength index and then, in chapter 4, I will move onto an equally efficient confirmation tool, and without doubt one of my favourites, directional movement. Most trading programs with coding capabilities similar to BullCharts and MetaStock can accommodate the internal strength index. The same programs will also include directional movement as a part of the indicator menu, so it is logical to direct the focus toward these tools and this style of charting software — although the concepts discussed can be effectively applied to any non–price based indicator without the requirement of major recoding. I will also build on previous discussions of indicator values in The Next Step to Share Trading Success, as this directly relates to the adaptation of indicators to price action. Later chapters will also look at effectively combining indicators with entry and exit techniques.

The range in application is almost infinite and beyond the scope of what I can cOver here in one book. In reality, I could write several books on the topic and still not cOver relative channels comprehensively. Take the time to learn and decipher the information that I have put before you and build upon it to the best of your understanding. In some cases, your conclusions will differ from mine; however, this does not imply that either is incorrect. They are just different, relative to the strategy in place. The more I think, the more I understand, the more I realise how little I know, the more my mind races with questions, new ideas and concepts. I have barely scratched the surface of adaptive relative analysis here and how I apply it to my everyday trading; however, I feel that I have given you sufficient information to get started without Overly confusing the issue. When reading through this book try to understand the underlying concept and how it relates to your personal understanding of price behaviour, rather than becoming tied down with minor and potentially immaterial points of interest.

Finally, please remember that what you are reading are the findings and observations of just one person. Where conventional analysis is concerned, there is the collective opinion of many traders that has been accumulated and documented Over literally thousands of hours of technical analysis, finally culminating in the understanding and accepted practice of today.

This is not the case here. I have not read about this style of analysis elsewhere. I have searched for similar publications in order to broaden my own understanding, but to date my search has proved fruitless. All you have is my personal observations drawn from everyday trading activities; therefore, you need to approach this style of analysis with a very open and investigative mind. It is simply impossible for me to identify and catalogue all aspects of this approach relative to all situations and strategies, as much of the sailing is done in uncharted waters. I can only relay to you my observations from my perspective in relation to how I approach the market. Once you start exploring the concept personally, I suggest that, as I do, you keep a notebook handy.

By the time you finish reading this book I suspect that the majority of you will never look at a 14-period indicator in the same light again. When someone stands before you singing the praises of a 14-period relative strength index — or, for that matter, of an arbitrary percentage trailing stop — you will feel the urge to slink down in your seat and hope the topic will suddenly change.

I wish you all the best and I hope that you find the content as I initially intended — thought-provoking.

Cheers

Leon Wilson

March 2006

Chapter 1

Appraising theory

If you are happy to trade using accepted practice and have no desire to probe the boundaries of technical analysis, there are plenty of solid technical trading programs at your disposal that will accommodate a more conventional approach. Many of these techniques have been tested Over time and proven effective, so all that is required on your part is familiarisation. The weakest link initially is you, as you come to terms with the strategy, tools and general application in real time. However, the potential problem with such programs Over the long term is that you will outgrow the software. Some of you may say that it is unlikely you will want to move beyond your present software; however, the continual learning curve that develops as you are trading and that leads to a deeper understanding of the market eventually has most people asking questions that basic and very rigid trading programs are simply unable to answer. This does not imply that the product is suddenly inferior, just that you are moving beyond its capabilities.

Over the course of this chapter, I will develop and test a basic trading strategy, and discuss which factors within the testing results to focus on. The discussion will highlight the factors that will then be used to compare the test results of each new concept that is tested throughout the rest of the book.

Outlining the testing program

If you are going to develop strategies and continually probe the boundaries of technical analysis, a quality testing program is essential in today’s trading environment. For years such products simply did not exist, unless you were prepared to purchase TradeStation. (MetaStock does include the system tester; however, in my opinion it is a very rudimentary feature when compared to specialised development software such as TradeSim.) In the era before simulation and development software, research and development was a very laborious task — to put it mildly. It involved many spreadsheets, real-time trading and a very basic assessment process of historical data in order to arrive at what was usually a questionable result. For example, I spent a considerable period of time refining the parameters for my relative percentage trailing stop. The best I could determine from this was that a longer period of around 21 days was more appropriate than the more accepted five periods applied to many trailing stops, and that 2.7 seemed like an ideal multiplication factor. While this worked well in real time, by the time everything was running smoothly the development process from start to finish had taken almost two years. Then I discOvered TradeSim. I spent one rainy afternoon reviewing my favourite trailing stop using TradeSim and, would you believe it, the program identified that a 2.7×(21) relative percentage trailing stop was ideal. What had taken me almost two years, was achieved in one afternoon. While this might disappoint some, I was ecstatic as it indicated that TradeSim had the genuine capacity to identify suitable values relative to real-time application. Occasionally one program will stand out as beneficial to your trading activities.