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Jay Norris
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Jay Norris is a 20-year CBOT floor veteran, author of the Best Seller "Mastering the Currency Market", McGraw-Hill, 2009, and "Mastering Trade Selection and Management", McGraw-Hill, 2011. He is a Market Analyst and Director of Education at where he teaches the... More
My company:
Trading University
My blog:
Seeking Alpha
My book:
The Secret to Trading Forex, Futures, and ETF's: Risk Tolerance Threshold
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  • Volume Down 50%!? = The Dawn Of The Golden Age Of Currency Trading

    Markets are like ocean liners, they take a long time and a lot of room to turn around. But when they do turn, they are likely to hold the course of their new direction.

    The current long-term bottom the U.S. Dollar has sewn in over the last several years, Figure 1, reminds me of the last currency market turn on such a large scale, in 2002. In 2000 every analyst on Wall Street was sure the Dollar was going to top out and the Euro, the other currencies, and gold were going to sail higher. Those markets did launch a major bull market, but it took a long time for the Greenback to top and the gold market had a lot of lurches and corrections before we saw smooth sailing on the upside.

    ImageFigure 1. Monthly Dollar Index Chart

    Similarly the U.S. Dollar is at the other end of the spectrum; stalled at the starting gate of a new bull market by falling volume and volatility following a 13-year bear market. The Monthly Dollar Index chart in Figure I highlights the falling volatility in the form of a falling ATR - Average True Range; while the 4-hour Euro chart in Figure 2 highlights the sharp drop in volume over the last 4 months.

    ImageFigure 2. 4-hour Euro chart highlighting falling volume

    The falling volume in the Euro pictured in Figure 2 is telling us that there are fewer and fewer new buyers during these rallies. With prices still rising the buying is more likely coming from short-sellers wishing to avoid losses. Falling volume in a rising market overall is considered a sign of overall technical weakness. While this is not actionable information for traders it is a part of the big picture, as is the falling volatility in the Dollar Index itself. Both technical situations point toward a long-term top for the Euro and a long-term bottom for the U.S. Dollar in the making.

    Another non-actionable indication of a major shift in the wind comes from the brokers themselves. There is no doubt that the plunge in trading volume is causing a major consolidation in the number of brokers, particularly in Forex. An exec at a large futures and Forex broker told me last week that "because of the low turnout and participation, it's no longer worth it for us to try to hold live webinars". I can't think of a better harbinger than that.

    We see the current environment as a precursor for a sea change move in the currencies and financial markets which will prove a bonanza for traders who made the cut following the Great Recession and who have been honing their skills since. Yes, we are entering the golden age of currency trading for experienced traders.

    To see Jay Norris highlight trade set-ups and signals in live markets during the London/U.S. overlap go to: Live Market Exercise. Jay is the author of "The Secret to Trading: Risk Tolerance Threshold Theory".

    Trading involves risk of loss and is not suitable for all investors.

    Disclosure: I am long UUP.

    Apr 29 2:25 PM | Link | 1 Comment
  • Trading: It Really Can Be Simple

    Given the correct map, the appropriate tools, and adequate supplies what appears to be the most difficult of journey's can be simplified.


    I have been emerged in competitive environments my whole life, and the one component of success that individuals overlook the most, which also happens to be the most important, is environment. You can have the best attitude on the planet, and lead the healthiest lifestyle contributing to an above average energy level, but if your efforts are not aligned with that of the environment you are operating in you are going to struggle. Likewise if your actions are aligned with the environment - i.e.: being in the right place at the right time -- less effort will reap greater rewards. Once you see the validity of this you realize how important "environment" is to investing and trading. So many traders believe their focus should be on competing with other companies or individuals in the market, and overlook the importance of definitively identifying whether they are in a bullish, a bearish, or a counter-trending environment, and then focusing on tactics that are supported by that environment.

    Pattern: The Fundamental's Footprint

    Technical analysis, or pattern recognition, involves identifying the current stance of a market, be it bullish or bearish or neutral, that the current economic environment has created, and looking to position ourselves to take advantage of that stance. Likewise we can also use reverse engineering to determine a market's stance by just observing which patterns and trade signals are being rewarded and trade along with them. The philosophy behind technical analysis is the belief that the pattern on the chart is the effect of fundamental news and information. By focusing solely on the effect of price movement, or specifically "how" price moves rather than "why" we open the door to an age-old market study which uncovers far more predictive behavior than we otherwise would see from focusing on the cause of market movement.

    (click to enlarge)
    Euro futures tick chart from 3-18-14

    An example of this predictive behavior can be seen in Figures 1 thru 3, which are intraday snapshots of the euro over 3 consecutive days. For the first two examples the Euro was in a bullish environment as measured by its tradable patterns - meaning we would only focus on buy signals (trend trades), while in the third example the market was in a counter-trending environment. The Risk Tolerance Threshold Ratio, or RTT Ratio, over-laid on each chart measures whether the different tradable time frame patterns are bullish or bearish. To determine which direction to trade from, we take any three consecutive patterns and take signals in-line with the majority of those three patterns. The majority of patterns determine which trade is a trend trade versus counter-trend trade. Depending on which three consecutive patterns we chose to trade can mean we are taking both buy and sell signals - i.e.: we are seeing both sides of the market -- as was the case in Figure 3.

    (click to enlarge)
    Euro Forex tick chart from 3-19-14

    What stands out in these examples is the market produced the same formation each time: a higher low in the form of a double bottom on a 50% retracement following a test of our Risk Tolerance Threshold Level - the RTT level is a specific retracement level which delineates whether a pattern is bullish or bearish that is based on Dow Theory.

    (click to enlarge)
    Euro Forex 3-minute chart from 3-20-14

    Focus on Effect not Cause

    The three charts highlight a remarkable characteristic about markets. Their movement or behavior is predictable when you remove causation from your analysis! These three charts represent three days in a row where the market produced nearly identical formations with identical results - winning trades - at approximately the same time of day!

    Seeing fish in the lake however and catching those fish are two different things, as are correctly analyzing a market and successfully trading that market. What you may have noticed about each chart is all three are different time frames ranging from a 40-tick chart to a 3-minute chart. If there is one thing teaching in live markets nearly every day over the past 5-years has taught me is we have to adjust to the speed of the market and not the other way around. There is no doubt markets are fractal in nature meaning they exhibit self-similar behavior on the highest time frames on down to the lowest time frames. When that truism hit me it opened the door to being able to see the remarkably simple and predictive way in which markets move on the lowest time frames. But before I saw that, I had to believe it could be true. Thank you Dr. Bill Williams and Benny Mandelbrot!

    When we look at a price chart we often see what we want to see, which is why it is so important that you are able to categorize each time frame pattern you analyze as being either up, or down. Or better yet have an agnostic indicator such as a retracement tool to make that simple determination for you.

    To see Jay Norris highlight trade set-ups and signals in live markets during the London/U.S. overlap go to: Live Market Exercise. Jay is the author of "The Secret to Trading: Risk Tolerance Threshold Theory".

    Trading is a risky endeavor and not suitable for all investors

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 10 12:11 PM | Link | 1 Comment
  • Applying Static & Dynamic Analysis To Your Trading

    Most of us are familiar with static analysis, which is defined as either fundamental or technical analysis as measured up to a particular point in time, i.e. previous market behavior. It is our static analysis that provides a directional bias - ideally a statistic based bias - be it a premise or assumption based on economic data (causation analysis) or price pattern. Yet once we have determined which market and direction to take a position in, how should we go about timing the entry, the management, and the exit of the trade/position when price is constantly revaluing itself based on new incoming news?

    This is where dynamic analysis plays an important role. Static analysis defines the underlying economics of a market up to that point, and/or that market's preceding technical environment and behavior, while dynamic analysis involves analyzing the market's evolving stance. It is important that you have a method or framework which gives you a definitive measurement of direction right now so you can see when market behavior is deviating or confirming your static analysis. And that tool needs to be dynamic, i.e.: it evolves as the market changes.

    An example of combining the two forms of analysis would be you have identified a down-trend in a market, and you are focusing on selling a rally in that down-trend - you are following a classic tenet of trading: sell rallies in down-trends or buying dips in uptrends. When price actually rallies - the set-up -- you need to switch to dynamic analysis -- and perhaps a lower time frame chart -- and wait to see if price does start to play out according to your plan. You need to monitor the market for a short-term change in direction and/or a shift in momentum in favor of your analysis before risking/committing to the trade. The static analysis identifies the set-up - the direction you are looking to trade in, while dynamic analysis - price behavior - supplies the actual trade signal. Figures 1 & 2 provide an example of such a trade following the March release of the U.S. employment numbers last Friday. On the first chart we have highlighted the bearish effect on the market of the news release and marked out a box that we zoomed in on on the 2nd chart.

    (click to enlarge)
    Figure 1. Static analysis of Euro following news release

    (click to enlarge)
    Figure 2. Dynamic analysis on lower time frame chart after the news release

    Given the manageable risk on the trade in Figure 2 the profit target was reasonable and more important reachable. For a video explaining that trade in greater detail go to: YouTube / EuroTrade

    Because dynamic analysis must evolve as price moves though time it will have to include market generated information which has the advantage of being fact based. Using "market generated information" means using only inputs or information provided by the market itself; for example using a market's high, low, and closing prices in your analysis. Using such specific information has the advantage of being easy to quantify when it comes to performance, and risk. In Figure 2 the reward on the trade is based on the risk with both being a function of real time market behavior. The advantage is you know ahead of time how much you are willing to risk, and the process lends itself to repetition which means we can accumulate statistical data. Price will always change - which is not always so with our own views and opinions.

    Many professionals already use dynamic analysis of price in the timing and management of trades, and more still are moving toward it for trade selection - previously the realm of economic fundamentals, i.e.: causation analysis. The one thing we can count on when it comes to market movement is change, which leads us to believe that dynamic analysis of price action - studying the effect of market movement rather than the cause -- is where tomorrow's traders want to be focused.

    Jay Norris is the best selling author of "Risk Tolerance Threshold Theory" and a trading instructor at Trading University

    Trading involves risk of loss and is not suitable for all investors

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 09 4:05 PM | Link | Comment!
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