The ACD Method
- Thread starter sbrowne126
- Start date
Do you know how I got over that? Number lines. That's the beauty of the number lines. They give you the confidence to play the bigger move. There are breakouts with flat number lines. There are breakouts with negative number lines. And then there are breakouts with confirmed number lines. THOSE are the runs that run. This is why I preach the number lines on here almost daily. I honestly can't stress it enough. Don't worry, I'll mention it again tomorrow.
BTW, this weekend I'm going to write a short novel on here about ACD and currency trading. Stay tuned...
I look forward to it.
Christmas is coming early this year.
Keep your pants on King, weekend ain't over yet.
So here is the soliloquy I promised on currency trading and ACD. This text has two purposes. One, to help guide any newbies reading this thread who are trying to start out in trading and don't know where or how to begin. The other is to show some of the more veteran traders what I believe are advantages that currency trading offers in context of ACD. I'll start with the veterans. And by veterans I mean active readers of the thread who have been using ACD for quite some time and are fully aware of the benefits and limitations as well as all the idiosyncrasies involved in ACD and there are many. At it's core, ACD is all about volatility. The volatility input affects almost every aspect of ACD from opening range, the ATR's to number lines, pivot ranges, etc. So most of you should have figured out by now that ACD works best in environments were volatility is best modeled. Or put another way, where the day to day volatility is consistent. Consistent does not mean the same, it simply means that the given product has predictable volatility cycles. The more predictable the cycle, the more accurate the A levels will be. The more accurate the A levels will be, the more accurate the number lines will be and so on. Over the last seven years, my observations have shown me time and time again that that volatlity in currencies seem to be the most reliable. And to that end, the A levels are almost pinpoint accurate. Currencies exhibit very predictable patterns over and over and over again that lend itself perfectly to ACD trading.
So what are my theories about this. One, I simply think the flow of money around the world is much more calendar oriented then perhaps say Corn or even Crude Oil. Currency fluctuations are driven by many factors, one being the demand for money in a particular currency relative to another. This demand comes from transactions between countries, interest rates, demand for particular products in a given country (their stocks, debt, resources), and lastly, the actions of large macro global hedge funds. These behemoth monsters control billions notionally and trillions via leverage and they aren't buying TSLA, they are moving into Yen. Pounds and Euros. And these global hedge funds have redemption cycles, annual marks to hit, etc that lend itself well to the various ACD cycles. So money by itself seems to follow very predictable patterns. While there may not be a "right" time to buy GOOG, most Americans get paid ever other Friday, increase spending around the holidays and weekends, reduce spending around tax time and tend to respond according to the cost of money (real interest rates). All these things create cycles that model well with ACD.
Next, we have the spread component of ACD. I've spent some time on here discussing spread trading and how spreads work very well with ACD. This makes intuitive sense when you think about combining two products that are producing opposite ACD signals. It also makes sense in that ACD is very much a methodology about relative value. If I'm telling you that GOOG has a strong number line, it's not only saying that GOOG is acting well against it's historical price action but I can compare the number line of GOOG to another stock or an index itself. Well, if you think about what currencies are, every one of them is a spread trade. Currencies do not exist as a stand alone product. Their value is derived in relation to another currency. If you change the denominator, the value changes. If you change the numerator the value changes. So if one is long USD/JPY, these are in fact two separate trades, not one. You are long US Dollars and short Japanese Yen. You can't really simply buy US Dollars, you have to sell something against it. Why Yen? Why not Pounds or Euros? It has to be because you believe putting Yen in the denominator will increase the spread value more then putting Pounds there. Therefore you have yourself a spread trade. This allows one endless combinations and permutations to create pairs. Using the number lines, one can easily isolate which country has the strongest demand for money against which that heave the weakest and by combining the two, one gets a more robust product then simply having a stand alone product. This makes the number lines on currencies VERY robust.
Third, let's talk about the execution of this product. Many products gap a lot and that creates havac on many a ACD chart as well as the number lines. This is obviously most common in stocks but can also happen in commodities when they go limit. Since currencies flow 24/7 there is a much smoother transition at the price level that allows the ACD levels to stay intact and the number lines to not have to make adjustments for gaps. Along these same lines, getting "into" the trade is easier. What happens when you get a buy signal in TSLA after it makes a large move? Do you chase? Do you wait and run the risk of missing the trade? Currencies in general chop. This is a good thing. They move in sine or wavelike pattern even when trending. This lends itself perfectly to ACD. It allows one to get entries at good prices almost 100% of the time as they can enter on daily pullbacks, weekly pullbacks, monthly pullbacks or even QTR pullbacks. Currencies don't go to the moon. The EURO/USD is not going to 200 this week if it breaks out like a stock could. It might move 200 pips with 100 pip pullback entries. This also allows the skilled trader to actively trade around his/her position to take advantage of the wave like motion. This is caused primarily because currencies trade around the clock with three major market time zones that often produce counter trend moves. The Euro might break out during the Asian session but get hit hard during the London session only to recover to new highs by the US session. With stocks and most commodities you have a very limited time window to get in or out. You can wait for a pullback but time is not on your side. With currencies you have nothing but time.
You often hear people talk about the trending aspect of currencies. This is true for the most part as the demand for money in various countries is controlled by their central banks monetary policy. And since this policy does not swing up and down the way a stocks earnings do, the trends tend to stay in tact longer. This is why it always puzzles me to hear people talking about the move being over in the Yen. The Bank of Japan (BOJ) can print for years and years and years. They will keep printing until they GET the result they want. THIS is why the move in the Yen will be sustained. It's very hard for stocks or commodities to do that because the natural demand is not fixed, it's variable. TSLA might be trending for weeks and then GS comes out and downgrades the stock and it takes a hit. Or some WSJ article comes out and says their cars explode. There is a lot of noise that can shake stocks. Oil and gas has inventory reports, grains have crop reports, stocks have earnings, upgrades/downgrades. While it's true currencies do get volatile around central bank meetings, the volatility in context of the bigger picture is rather tame and actually works IN the traders favor. In fact, volatility can only really help the FX trader. Why? Well, we are making two assumptions here about FX. One, a currency can't go to zero. And two, it can't go to infinity. In fact, as it approaches zero and infinity (in a relative sense of course) the brakes get slammed. This is not true of the ES or AAPL or even Oil. In fact, when large moves happen in these products, it tends to accelerate volatility, not slow it down. This is because stocks CAN go to zero and they CAN go parabolic. Oil went from 12 to 147 back down to 35. AAPL from single digits to 700 back down to 350 and back to 550 plus. As currencies get too expensive or too cheap, central banks will step in and supply money or reduce supply to stop volatility or minimize it. The point I want to get to here is that if one wanted to buy the USD/YEN and some news came out that sent the pair down 200 pips, it's much easier for a trader to step in and take advantage of this volatility and buy the pair on a long signal then say step in front of GOOG while it's in free fall. GOOG will run you over, the USD/JPY won't.
So what are my theories about this. One, I simply think the flow of money around the world is much more calendar oriented then perhaps say Corn or even Crude Oil. Currency fluctuations are driven by many factors, one being the demand for money in a particular currency relative to another. This demand comes from transactions between countries, interest rates, demand for particular products in a given country (their stocks, debt, resources), and lastly, the actions of large macro global hedge funds. These behemoth monsters control billions notionally and trillions via leverage and they aren't buying TSLA, they are moving into Yen. Pounds and Euros. And these global hedge funds have redemption cycles, annual marks to hit, etc that lend itself well to the various ACD cycles. So money by itself seems to follow very predictable patterns. While there may not be a "right" time to buy GOOG, most Americans get paid ever other Friday, increase spending around the holidays and weekends, reduce spending around tax time and tend to respond according to the cost of money (real interest rates). All these things create cycles that model well with ACD.
Next, we have the spread component of ACD. I've spent some time on here discussing spread trading and how spreads work very well with ACD. This makes intuitive sense when you think about combining two products that are producing opposite ACD signals. It also makes sense in that ACD is very much a methodology about relative value. If I'm telling you that GOOG has a strong number line, it's not only saying that GOOG is acting well against it's historical price action but I can compare the number line of GOOG to another stock or an index itself. Well, if you think about what currencies are, every one of them is a spread trade. Currencies do not exist as a stand alone product. Their value is derived in relation to another currency. If you change the denominator, the value changes. If you change the numerator the value changes. So if one is long USD/JPY, these are in fact two separate trades, not one. You are long US Dollars and short Japanese Yen. You can't really simply buy US Dollars, you have to sell something against it. Why Yen? Why not Pounds or Euros? It has to be because you believe putting Yen in the denominator will increase the spread value more then putting Pounds there. Therefore you have yourself a spread trade. This allows one endless combinations and permutations to create pairs. Using the number lines, one can easily isolate which country has the strongest demand for money against which that heave the weakest and by combining the two, one gets a more robust product then simply having a stand alone product. This makes the number lines on currencies VERY robust.
Third, let's talk about the execution of this product. Many products gap a lot and that creates havac on many a ACD chart as well as the number lines. This is obviously most common in stocks but can also happen in commodities when they go limit. Since currencies flow 24/7 there is a much smoother transition at the price level that allows the ACD levels to stay intact and the number lines to not have to make adjustments for gaps. Along these same lines, getting "into" the trade is easier. What happens when you get a buy signal in TSLA after it makes a large move? Do you chase? Do you wait and run the risk of missing the trade? Currencies in general chop. This is a good thing. They move in sine or wavelike pattern even when trending. This lends itself perfectly to ACD. It allows one to get entries at good prices almost 100% of the time as they can enter on daily pullbacks, weekly pullbacks, monthly pullbacks or even QTR pullbacks. Currencies don't go to the moon. The EURO/USD is not going to 200 this week if it breaks out like a stock could. It might move 200 pips with 100 pip pullback entries. This also allows the skilled trader to actively trade around his/her position to take advantage of the wave like motion. This is caused primarily because currencies trade around the clock with three major market time zones that often produce counter trend moves. The Euro might break out during the Asian session but get hit hard during the London session only to recover to new highs by the US session. With stocks and most commodities you have a very limited time window to get in or out. You can wait for a pullback but time is not on your side. With currencies you have nothing but time.
You often hear people talk about the trending aspect of currencies. This is true for the most part as the demand for money in various countries is controlled by their central banks monetary policy. And since this policy does not swing up and down the way a stocks earnings do, the trends tend to stay in tact longer. This is why it always puzzles me to hear people talking about the move being over in the Yen. The Bank of Japan (BOJ) can print for years and years and years. They will keep printing until they GET the result they want. THIS is why the move in the Yen will be sustained. It's very hard for stocks or commodities to do that because the natural demand is not fixed, it's variable. TSLA might be trending for weeks and then GS comes out and downgrades the stock and it takes a hit. Or some WSJ article comes out and says their cars explode. There is a lot of noise that can shake stocks. Oil and gas has inventory reports, grains have crop reports, stocks have earnings, upgrades/downgrades. While it's true currencies do get volatile around central bank meetings, the volatility in context of the bigger picture is rather tame and actually works IN the traders favor. In fact, volatility can only really help the FX trader. Why? Well, we are making two assumptions here about FX. One, a currency can't go to zero. And two, it can't go to infinity. In fact, as it approaches zero and infinity (in a relative sense of course) the brakes get slammed. This is not true of the ES or AAPL or even Oil. In fact, when large moves happen in these products, it tends to accelerate volatility, not slow it down. This is because stocks CAN go to zero and they CAN go parabolic. Oil went from 12 to 147 back down to 35. AAPL from single digits to 700 back down to 350 and back to 550 plus. As currencies get too expensive or too cheap, central banks will step in and supply money or reduce supply to stop volatility or minimize it. The point I want to get to here is that if one wanted to buy the USD/YEN and some news came out that sent the pair down 200 pips, it's much easier for a trader to step in and take advantage of this volatility and buy the pair on a long signal then say step in front of GOOG while it's in free fall. GOOG will run you over, the USD/JPY won't.
Most of you guys have probably heard me say on here countless times, follow the money. Even if all you trade is oil or spoos, follow the money. The demand ALWAYS begins with the currency. Why? Because that is the unit in which your product is being bought. You may not realize this but when you buy AAPL, you are shorting the USD at the same time. Why? Because you trade actually looks like this: AAPL/USD. You are funding your purchase your AAPL shares with dollars. Most people won't notice this much of course because the price volatility in AAPL far outpaces the volatility in the Dollar. If you guys tracked FX movements more, you would be spotting the turns in Oil, ES and even AAPL much quicker then just staring at it's respective chart. This is because demand begins with the currency and then with that currency follows through to the transaction. Often I would hear on ET, why are people buying US Bonds that pay no interest. What many are missing is that our bonds are being purchased by foreigners that actually are really betting on our currency, not our debt. What they REALLY want to do is buy dollars and the bond is simply where those dollars are stored. So while it may seem that they are only making 3% to 4% on their money, they are actually making 10% to 15% by the time they sell the bonds and convert back to their currency. The demand for debt around the world is often derived for the demand in their currency. In the 1980's a killing was made with the purchase of Brady Bonds. These were debt instruments issued in Brazil and other South American Countries. The killing was made threefold. Their debt was paying huge interest rates. The principal value of their debt increased and lastly the value of the currency shot up. So for those of you who like to map out the big picture and analyze long term macro-economic trends, the currencies provide a treasure trove of information to dive into. If you follow the currency markets daily, you will have a far better understanding of the world, the market and where money is flowing into and out of. Ignoring this and you are simply trading the tail of the dog.
Let me use this last part to dispel some common myths or misunderstandings of currencies. Let me start by saying I truly believe currencies need to be traded with a long term view. That is not to say one cannot daytrade them, it simply means that all the things that benefit the long term trader tend to work against the short term trader. There is a lot of baseless noise intra-day that I feel is very random. Many on here will blame evil bucket shops for running stops and so on, when in reality, currencies are just erratic intra-day. They are prone to spikes anytime ANY news comes out in ANY country. The world never stops spinning and the news cycle for currencies never stops. Sure there are patterns intra-day but the product you are trading is deriving it's value from long term expectations. Having said this, the rants I often here about how wide certain spreads are become a moot point. If I'm trying to take 800 pips out of the USD/JPY do I honestly care if firm A is 1 pip wide, firm B is 1.5 pips wide and firm C is 1.8 pips wide? It matters not to the longer term trader. In fact, if you compare currencies to options, futures and stocks and use the commission + the bid/offer spread as your total cost, you will find the spreads in FX to be very tight. Another common remark I might get is, but Mav, with stocks I can trade 100's of different products and currencies there are just a few. Actually, the combinations of can easily reach 100 + and even if we eliminate the more exotic pairs, there are easily over 30 good pairs. Most people don't watch more then 20 to 30 stocks at a time or more then a handful of commodities. Then you have the FX is a scam crowd. Ignore all this. Yes, the FX "business" is full of scams and that is due primarily to the wild west mentality of the market and the lack of regulations. George Soros, Bruce Kovner, Bill Lipshultz and Andy Krieger certainly don't believe it's a scam. And this goes without saying, don't abuse the leverage.
Some of the structural benefits of FX are obviously no hard to borrows. Get long or short anything you want. No licenses to attain. Plenty of leverage. Cheap access to capital. Yes, you can actually get paid to put on FX trades. Because this business is so competitive, there are many brokers competing for your business which means there is a limitless amount of solid info out there. Live real time news feeds, real time economic reports all over the world, plenty of in depth analytics, all provided to you free of charge. Try getting that in the equity and commodity markets. Software is usually always free. Currencies are never halted. And yes, you can trade with the big elephant in the room, the central banks. It's very hard to know who the big elephant is in equities, but in the FX world it's the central banks and they actually TELL you what they are going to do BEFORE they do it.
Let me add one more thing here. I talked about putting trades on for free. While rates are low now, eventually they will go back up and one of the best trades going when they do is creating all the various carry trades. This is where you can borrow money for free in one country and get paid higher interest in another country. With a little bit of leverage, these trades can produce far better revenue streams then the old fav naked option selling or iron condors. Much easier to manage as well. And much better margin. Now on a closing note before I move over to the newbies. I'm no where in here implying there is some kind of edge in this product that does not exist elsewhere. This assumes a constant edge. Meaning whatever you are using in one market to analyze and make trades, you can use in this market. Here with the context of ACD, I'm saying ACD models very well with currencies. No one is handing out free money. And yes, trading FX requires all the long hours of research you would have to put in trading other products. Currencies give you all sorts of ways to replicate trades you might want to express in other markets. For example if you want to express a view in interest rates, stock prices, commodity prices, being long or short risk, being long or short volatility, etc. All these ideas can be expressed with various currency pairs. For example, many people are buying the USD/JPY as a way to be exposed to long Japanese equities. They are the SAME bet. Many people were shorting the AUD/USD as a way to short Gold without the volatility one has to endure in Gold. Many trades found unique ways to short US equities without having to endure the constant rally in US equities by trading an FX pair that behaved the same way as an ES short without the drawdown. The opportunities are endless. I could go on about how to use options in FX but I'll save that for another time.
The next segment will be for the newbies...
Let me use this last part to dispel some common myths or misunderstandings of currencies. Let me start by saying I truly believe currencies need to be traded with a long term view. That is not to say one cannot daytrade them, it simply means that all the things that benefit the long term trader tend to work against the short term trader. There is a lot of baseless noise intra-day that I feel is very random. Many on here will blame evil bucket shops for running stops and so on, when in reality, currencies are just erratic intra-day. They are prone to spikes anytime ANY news comes out in ANY country. The world never stops spinning and the news cycle for currencies never stops. Sure there are patterns intra-day but the product you are trading is deriving it's value from long term expectations. Having said this, the rants I often here about how wide certain spreads are become a moot point. If I'm trying to take 800 pips out of the USD/JPY do I honestly care if firm A is 1 pip wide, firm B is 1.5 pips wide and firm C is 1.8 pips wide? It matters not to the longer term trader. In fact, if you compare currencies to options, futures and stocks and use the commission + the bid/offer spread as your total cost, you will find the spreads in FX to be very tight. Another common remark I might get is, but Mav, with stocks I can trade 100's of different products and currencies there are just a few. Actually, the combinations of can easily reach 100 + and even if we eliminate the more exotic pairs, there are easily over 30 good pairs. Most people don't watch more then 20 to 30 stocks at a time or more then a handful of commodities. Then you have the FX is a scam crowd. Ignore all this. Yes, the FX "business" is full of scams and that is due primarily to the wild west mentality of the market and the lack of regulations. George Soros, Bruce Kovner, Bill Lipshultz and Andy Krieger certainly don't believe it's a scam. And this goes without saying, don't abuse the leverage.
Some of the structural benefits of FX are obviously no hard to borrows. Get long or short anything you want. No licenses to attain. Plenty of leverage. Cheap access to capital. Yes, you can actually get paid to put on FX trades. Because this business is so competitive, there are many brokers competing for your business which means there is a limitless amount of solid info out there. Live real time news feeds, real time economic reports all over the world, plenty of in depth analytics, all provided to you free of charge. Try getting that in the equity and commodity markets. Software is usually always free. Currencies are never halted. And yes, you can trade with the big elephant in the room, the central banks. It's very hard to know who the big elephant is in equities, but in the FX world it's the central banks and they actually TELL you what they are going to do BEFORE they do it.
Let me add one more thing here. I talked about putting trades on for free. While rates are low now, eventually they will go back up and one of the best trades going when they do is creating all the various carry trades. This is where you can borrow money for free in one country and get paid higher interest in another country. With a little bit of leverage, these trades can produce far better revenue streams then the old fav naked option selling or iron condors. Much easier to manage as well. And much better margin. Now on a closing note before I move over to the newbies. I'm no where in here implying there is some kind of edge in this product that does not exist elsewhere. This assumes a constant edge. Meaning whatever you are using in one market to analyze and make trades, you can use in this market. Here with the context of ACD, I'm saying ACD models very well with currencies. No one is handing out free money. And yes, trading FX requires all the long hours of research you would have to put in trading other products. Currencies give you all sorts of ways to replicate trades you might want to express in other markets. For example if you want to express a view in interest rates, stock prices, commodity prices, being long or short risk, being long or short volatility, etc. All these ideas can be expressed with various currency pairs. For example, many people are buying the USD/JPY as a way to be exposed to long Japanese equities. They are the SAME bet. Many people were shorting the AUD/USD as a way to short Gold without the volatility one has to endure in Gold. Many trades found unique ways to short US equities without having to endure the constant rally in US equities by trading an FX pair that behaved the same way as an ES short without the drawdown. The opportunities are endless. I could go on about how to use options in FX but I'll save that for another time.
The next segment will be for the newbies...