Key insights from 3 major indices – STI, Nikkei, Dow Jones

The Dow Jones has found support at the bottom of the channel, and this could mark the end of its decline and the resumption of its slow creeping journey upwards. The Dow heading upwards could improve global sentiment and give a boost to all indices worldwide.
 
After the steep drop from the earthquake disaster, the Nikkei has found support at the previous low. The fall has stabilised with a couple of harami inside bars, with one of the bars being a hammer. With Warren Buffett stepping out to encourage buying, it suggests that the situation in Japan is much under control now.
 
The STI is coming out of the oversold zone, but the question is whether one should buy on dips or short on rallies. Looking at the recent price channel, it is clearly sloping down, and price is under the 200-day moving average, a common gauge of bullishness/bearishness, and in this case bearishness. Based on my trend-following approach, I would avoid going long against the trend. However, neither would I go short now since the reward/risk is unfavourable. I am anticipating this week to close up, but would prefer to see at least a higher low form before considering going long.
Remember, trading is not about calling every small turn, but rather having the patience to wait for the best setups, and positioning yourself such that the odds are in your favour. Good luck!

Anchoring Bias – I Refuse to Change My Mind!

Anchoring and adjustment is a psychological heuristic that influences the way people intuit probabilities. Traders exhibiting this bias are often influenced by their initial opinions, the initial trend, or arbitrary price levels such as their entry or target prices – and tend to cling to these numbers when making their buy/sell decisions.

 

 

This is especially true when the introduction of new information regarding the security further complicates the situation. Rational traders treat these new pieces of information objectively and do not reflect on purchase prices or target prices in deciding how to act.

Anchoring and adjustment bias, however, implies that investors perceive new information though an essentially warped lens. They place undue emphasis on statistically arbitrary, psychologically determined anchor points. Decision making therefore deviates from neoclassically prescribed “rational” norms.

For example, traders who are anchored to the initial trend are slow to catch on when the trend has reversed, especially if they are caught on the wrong side of it. This will lead to a reluctance to change their view and reverse their positions.

How will this affect your trading?

Traders who are anchored to price levels, such as their entry price, will refuse to cut their losses until prices go back to the entry price which they have anchored to. Traders may also refuse to take profit at a less desirable price because they missed the chance to take profit at a more favourable price, and they have now anchored to that price and refuse to settle for less.

The key to overcoming this bias is to be flexible and objective, being able to evaluate prices and make decisions objectively, whether you are in, out, up or down.

Major Commodity Indices reaching a roadblock – how will these affect the commodity stocks? | Technical Analysis | Commodity Indices


Both the CRB and the DJC commodity indices are near the crucial 50% retracement level, which will act as strong resistance. Prices will definitely not sail right past this level, hence there will have to be some sort of reaction, for example like a pullback or consolidation, or even a correction. This could act as a drag on commodity stocks in the coming weeks. This once again highlights the importance of tracking the various global markets, even when your main market is the Singapore market. Stay tuned!

The Time Element – Choosing the Correct Timeframe

Every trader knows that using multiple timeframes can provide different perspectives on the market, and provide key information on the lead-lag relationship. Small timeframes lead larger ones, and larger ones drive the smaller ones. Understanding the inter-play is crucial.

 

 

Since trends exist on different timeframes, it makes sense to analyse at least two timeframes. For example, if one’s main timeframe is the daily chart, one can consult the weekly chart to see the big picture. This allows investors to analyze a particular trend against the perspective of the next higher timeframe.

If one is using swing counts, a lower/higher high/low in the weekly and monthly charts can provide perspectives not seen in daily charts. Long-term trendlines may be clearer, and more obvious/easily visible. Certain price patterns are more visible on long-term charts (key reversals, triangles on weekly), as well as long -term support and resistance levels.

A trend change signal on the short-term (daily) may only be a retracement in the long-term (weekly) chart. On the other hand, a trend change signal in the long-term chart may be a substantial move in the short-term even though a short-term move may seem overdone. Hence, an overdone breakout on the short-term trend may actually be the start of a major breakout if the long-term chart is still on an uptrend.

Divergence signals are also more obvious when timeframe is compressed, for example a price-volume divergence is more obvious on the weekly compared to the daily. Divergences on the larger timeframes also point to larger moves, and could herald major reversals.

In conclusion, using multiple timeframes allows one to better identify trends, and more precisely pinpoint entries and exits by zooming in and zooming out from the initial point of reference. This also allows one to better manage risk in line with one’s time horizon and investment timeframe.

The Dual Timeframe Technique (NEW!)

This involves using 2 different timeframes to trade, one to provide the roadmap and the other to time the precise entries and exits.

Strategic Timeframe: This timeframe acts as a roadmap for the execution timeframe, giving you an idea of longer-term trends, hence providing you strategic direction on how to select your setups and manage your trades.

Execution Timeframe: This is your main timeframe for trading, and will be what you are looking at as you decide on your stoploss, entries, and exits. The focus is on precision and timing, so this timeframe is like zooming in from your strategic timeframe.

For example, for my strategies, I use:

Strategic Timeframe: Weekly chart
Execution Timeframe: Daily chart
Expected holding period: Can last for a few days to a few weeks (if the trend is strong)

Overconfidence Bias – How Can I Ever Be Wrong?

Overconfidence is the unwarranted faith in one’s intuitive reasoning, judgments, and cognitive abilities. Studies conducted have shown that people overestimate both their own predictive abilities and the precision of information that they have been given. In addition, people are poorly calibrated in estimating probabilities – events which they think are certain to happen are often less than 100% certain to happen.

 

 

In short, people think that they are smarter and have better information than they actually do. For example, they may get a tip from a broker or read something off the internet, and they’re ready to take action, such as placing a trade, based on the perceived knowledge advantage. If there is no logical basis for the advantage, then this perceived edge does not exist at all, despite what the trader thinks he knows.

There are two kinds of overconfidence – prediction overconfidence and certainty overconfidence. In prediction overconfidence, the confidence intervals that traders assign to their predictions are too narrow. An example of this is when gurus try to forecast precise price targets. In certainty overconfidence, traders are too certain of their judgments. For example, after entering a “sure-win” trade, traders become blind to the prospect of a loss, and then feel disappointed or surprised that the trade performs poorly. Always keep in mind that trading is a game of probabilities, and nothing is 100%.

How does this affect your trading?

The dangers of overconfidence are numerous. For example, if traders overestimate their ability to pick a winning trade, they become blind to warning signs or information that indicate that their decision was wrong. This might make them enter bad trades or hold on to losing positions. If traders believe they have special knowledge, they may also end up trading excessively. Overconfidence can also cause traders to underestimate downside risk, and in worse cases not using a stoploss.

“Too many people overvalue what they are not and undervalue what they are.”
– Malcolm S. Forbes