Why ‘Less is more’ to us
In most professions working more is usually what makes you more money, especially when you are being paid for your time. This concept however cannot be said for trading. In fact ‘Over Trading’ can and usually results in losses!
Trading does not reward the hours you spend staring intently at the one hour chart, nor does it reward how many times you enter or exit trades. You get rewarded by making informed decisions, by being patient and waiting for a trade to present itself.
Chasing the markets around all day, Is not the way forward!
At Bottomcatcher, we are strong believers in ‘Less is More’ less time trading, more time researching and preparing.
Forecasting Future Market Price Moves Is A Bit Like Forecasting The Weather
What chance do traders have at forecasting future prices moves on short time frames and being consistent at it? On a scale of 1 to 10 I would give them a hard 2… And that’s me being generous. The fact is, being consistent at this is almost impossible.
So how do we do it?
Our approach to the market consists of researching assets once they have reached an extreme. In order to ascertain a constructive approach to the markets we primarily focus on fundamental data from data providers such as the ‘Commitment of Traders’ report (COT) along with other data providers. This gives us a clearer insight when choosing ‘WHAT’ to trade
We also monitor the participants in the Options Markets (in particular the small options traders) and Futures Markets (Commercial Hedgers, Funds, Small Speculators) in order to determine sentiment.
So Instead of trying to forecast future price moves, we would rather rely on Fundamental Data that has a tendency to ‘DRIVE’ prices.
Time Frames. Keep in mind the word ‘Consistent’ which you need to be if you’re going to make money at trading. We focus on Longer time frames. Short Term to us means up to 3 weeks, not up to 3 hours. Like the title says ‘Forecasting Future Market Price Moves Is A Bit Like Forecasting the Weather’ and it’s true! Weather forecasters have got a greater chance of being accurate if they were to say ‘It’s going to rain next week’ as opposed to saying ‘It’s going to rain next Wednesday at 10.36am’. Same with trading, by combining Fundamental Data with Technical Analysis, we have a greater chance of getting it right on a weekly or daily time frame than we have on an hourly time frame. Fact!
Structure. Equally as Important as doing the research. There are many good traders out there, clever ones as well, with credentials that would blow you away and a resume that wouldn’t look out of place sitting on the desk at NASA’s recruitment department. But when it comes to looking at their activity history on their trading platform, it’s a very different story.
Structuring your Research and Analysis is paramount, in other words being organized, which so many traders fail at
At Bottomcatcher we adhere to a robust procedure that we carry out on each and every asset we intend on trading. It’s a lot of work but it pays off!
It’s a Minefield Out There!
One of the problems traders will always be faced with (in particular novice traders) is they pretty much have to figure things out for themselves when it comes to trading. There’s no trading school they can attend and most of the courses that are available are usually the same old thing..teaching students how to use this indicator or that candlestick pattern or how to identify a trend or what a Head and Shoulders chart pattern looks like. Sure, it’s all good information which we all need to know about, but will it help them make money when trading?… On its own, absolutely not!
Most traders who can hack it on their own and actually make a living out of trading have almost all got a couple of decades experience behind them, me included! It’s an absolute minefield out there, one wrong move and the markets will take you out. There are so many things to consider before entering a trade, it’s simply unimaginable. Having a checklist plastered on the wall next to your desk is a must! And keeping a detailed journal makes all the difference, again what so many traders fail to do.
At Bottomcatcher we aim to leave little to chance, being proactive and our thoroughness is what stands us out from the others.
What we look for.
- Bottoms and Tops
- Turning Points
- Chart Patterns
Finding extremes in assets usually gets our attention, or at least motivates us to dig a little deeper and see if the extreme (or exhaustion) is just noise due to an announcement or some data release, which is usually short lived and can have a tendency to mean-revert. However extreme readings do occur ‘when they are supposed to’ and it’s those types of readings we look for.
Bottoms & Tops
Since we like to get the ‘Meat of the Trend’ a good place to start is at the bottom or top of a trend. Having the ability to Identify a Top or Bottom is most important for trend traders like myself. Getting into position at a Top or Bottom enables us to minimalize risk, with regards to gap-down/up, stop-loss issues etc.
When researching assets, sentiment is our main focus. It tells us the overall attitude of investors, and how their opinions influence market price moves on any given security or asset. There are 5 main groups of traders we monitor in order to gauge sentiment.
Commercial Hedgers: more commonly known as ‘Smart Money Hedgers’ this group of traders have proven themselves to have an excellent handle on the underlying markets.
Funds/Banks etc: These are trend followers by definition, and it often pays to know the exposure held when a trend is in play.
Small Speculators: Terrible market timers, this group of traders often run into trouble at Tops and Bottoms as they become too bullish when markets are peaking and about to correct (change direction), and too bearish when there are no sellers left and demand is high.
Option Traders (small Option traders in particular): Mostly always wrong! Since they are working with a depreciating asset, meaning they lose value as time passes, and their trades are governed by a limited lifetime, they usually end up worthless unless their asset moves quickly in their desired direction, which seldom happens.
Futures Traders: Monitoring this lot to determine sentiment definitely gives us an edge. There are a lot of things they need to consider and understand, which so many of them don’t, like Leverage, Interest Rate Risk, Liquidity Risk, Operational Risks, Settlement and Delivery Risk. Usually sentiment is mixed, but when the overall sentiment on an asset becomes too optimistic or pessimistic, a contrarian’s approach usually pays off.
In relation to Tops and Bottoms recognising turning points gives us further confirmation that a new trend is perhaps underway.
There are many chart patterns out there, some we like some we don’t. Through back testing dozens of chart patterns over the years we have selected our most popular chart patterns that we look for and that we believe are most reliable.
Continuation Chart Patterns
Bullish Flag Pattern
Bullish Pennant Pattern
Bullish Falling Wedge
Bearish Flag Pattern
Bearish Pennant Pattern
Bearish Rising Wedge
Cup and Handle Pattern
Reversal Chart Patterns
Bearish Double Top
Bullish Double Bottom
Breakouts from the above chart patterns (Green Arrows) is confirmation that the pattern is likely to play out.