Saturday, June 30, 2018

Jesse Livermore, the Dow and the changing market state

Below we have the current daily chart of the Dow. This is a classic example of a 'tale of two market states'. Up to the beginning of February, we can see a stable (low volatility), trending state. And from the beginning of February to date, a volatile, non-trending state. This is highlighted by the rise in the readings of the volatility factor indicator and the 2ATR measurement.

I have no idea or opinion about where price will go from here, or how long this non-trending, volatile state will last. Price can move from one state to another at any time.

When I see a chart like this, what do I do? Well, as regular readers will know, price (and volatility) gives me all the information I need to know, and my trading rules tell me how to act and when. I don't need to listen or read what the 'experts' and forecasters think about it. I just follow my rules, and treat everything else as noise.

As it is, I was able to profit from a signal given in this market during the more favourable market state towards the end of last year, and have avoided the subsequent signals in the more difficult market state this year (See this post for more).

To me, it's not exactly rocket science. The current potential risk:reward is a lot less favourable purely from a mathematical point of view. This is as, based on my own rules and how I would calculate my position size and initial stop distance, price would have to move much further in a sustained direction (trend) after a signal is given to generate each unit of 'R' of profit. There are better potential opportunities to look for.

And if I happened to trade a small basket of instruments which were all exhibiting the same characteristics (unlikely I know, but theoretically possible), then the following quote from Jesse Livermore would spring to mind:

"There is a time to go long. There is a time to go short. And there is a time to go fishing."

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