The Finance Book Club

The market moves upwards without giving us a second touch so we have to sit on our hands til summer when I see (maybe) a 'wammie'. If I actually took profits at the zone barrier it would be something like a 5:1 risk:reward trade which seems ..unwise so I decide to hold for the next zone and once again it works. 160+ pips and maybe more if you trailed.

I don't see any more opportunities on this chart in 2021. Did I miss any? Still 3/3 or 100% win rate is nothing to scoff at. If you can trade half a dozen times a year and endure seeing swap fees pile up before cashing in, this might be a system you would want to consider.

Note that I disregarded all the recommendations in post #256 because otherwise I'd never have entered a trade. It didn't seem to hurt in this case.

Are 3 trades over half a year on a single instrument enough to verify this method works and affirm the importance of double tops and bottoms? I guess not, but then again, it wouldn't be enough to dismiss it either.

Is it worth digging deeper into this?
Should I try this on USDJPY and USDCHF? Let me know!

GBPNZD
If I call this 'trading higher lows and lower highs' instead of 'double top' or 'double bottom' then this seems to be a perfectly cromulent way to trade but you'll have to add a bunch of 'house' rules to the recommendations given by N&W otherwise you'll end up with situations like this, where price nearly hits a 'zone' but then comes right back and stops out for a massive loss. Since you're only trading a few times a year, such losses are not only expensive but a huge waste of time.

Would the secondary recommendations (see post #256) have helped us avoid such trades? The answer appears to be no.
The astute observer will see that touch 2 is actually a big shadow! Yet it didn't portend a big short trade.

Of the last few successful trades some are pretty flat, and on USDJPY we can see many successful 'flat' trades. The last trade on USDCHF has a second touch that is steeper than the previous successful trades but it still fails. It doesn't matter where you enter - it matters where you exit, as we've seen so often before. 'Naked Forex' uses 'zones' for exits (at least until we get to chapter 11) and these don't seem to be a great way to select exit points, even though the rationale behind them is clear. We expect price to return to past support and resistance. The fact is, it often doesn't.

Yeah, ok, but how do we do that? Count the number of 'touches' on the zone? This is obviously of no benefit if you go through the example charts. This system works best on trending instruments and in a trend there are hardly any repeating touches per 'zone'.

First of all, you're rarely going to encounter such setups because if there are few zones nearby it means price hasn't visited this area in a while. Secondly, this could be a self-fulfilling prophecy if you are simply very strict about where you draw zone boundaries. If you simply placed lines an arbitrary distance away and insisted on a target at that distance you'd likely do just as well. 'Naked Forex' depends on 'zones' and what I'm seeing is that zones aren't real.

USDJPY

USDCHF


What is real is that if price is making higher lows and lower highs it is more likely to keep doing that than to stop doing that.

I can tell by the crickets in this thread that the material I'm going through must be PURE GOLD (according to Clemmo's Conjecture) so let's continue with the next exciting pattern:
Kangaroo Tails!

The chapter heading of this one rings particularly true for me.

The kangaroo tail is just a renamed classic candlestick pattern. I've seen them called hammers, morning stars, dawn stars, shooting stars, hanging men, hanging stars, you get the idea.

Here is a kangaroo tail:

This should be the easiest pattern to spot and test so far!

 

1. The kangaroo tail should be 'much longer' than the body.
2. The long tail suggests the market is overextended and retracing
3. Open and close near an extreme end (top or bottom third) of the candle
4. The body of the candle's close must not exceed the range of the previous candle - this would indicate a heavily trending market and the kangaroo tail is a reversal signal
5. another way to say the same thing: the open and close price is contained by the range of the previous candle
6. as much 'room to the left' as possible
7. no 'very big' candles to just prior to the kangaroo tail (again a sign of a hot trend)
8. bullish kangaroo tails have closing prices higher than opening
9. bearish kangaroo tails have closing prices lower than opening
10. candlestick after the kangaroo tail breaks the high or low of the 'head' of the signal candle
11. candles with ranger greater than 10 previous candlesticks
12. printing 'on a zone'
    
    Attached Image (click to enlarge)

    
    

Tomorrow: the tests

Same general approach as before. I start with this year and mark tall candles. Then I do a visual inspection of those candles to see if they match the criteria for a 'kangaroo tail.'

I start by marking potential candidates and I plan to add the 'zone' levels later.

The first thing I notice is that if we take the canonical definition provided by the Naked Forex authors of a 'kangaroo tail' they might as well be called 'hen's teeth' because they are just as rare. I find only four examples on USDJPY H4. I decide to widen the definition a bit by looking at candles that aren't the tallest within ten bars, and ignore the prohibition against using ones that are not contained within the body of the previous candle range. To be fair though, I mark these ones a different colour so that we can see how important those other factors might be.

After doing this I decide that one of the canonical signals is not good enough (not close enough to one end of the range bar) and so I omit it. That leaves 3 signals, of which 1 succeeded.

The non-canonical examples of which I found 9, had one that generated no trade (price didn't break past the 'head' of the tail) and the rest succeeded 3 times and failed 5 times.

4/11 or nearly 1/3 success.

Let's try EURUSD and USDCHF, and GBPNZD next.

I forgot to mention that I am also 'cancelling' the signal if price reverses to break the tail of the kangaroo before price has broken the head of the kangaroo. I don't think it really matters though.

The Euro results are far worse. I find only 3 successes in a couple of dozen signals, all on non-canonical examples. One of which was charitably assigned because price moved so far in the right direction before missing a zone.

I must also admit that much of the failure for these signals could be due to how strictly I am defining a zone target and how I've drawn the zone lines. You can consult the template if you wish, to see if I'm being unfair. I've already mentioned several times how much I dislike this notion of 'zones' and how poorly they are defined in the book. Another cause of failure could be that I'm not waiting for the 'very best' signals but this seems to mean taking trades less than once a season if that, and I don't know anyone that patient. Furthermore I don't think the market is so precious that there is any reason to wait so long except with the intention of entering at all-time highs or lows.

I will leave more tests of this method as an exercise for the diligent reader, if they exist.

But now it's time to stop and think. Why? Why did this pattern fail so miserably, as did the last kiss method, while the wammies and moolahs system and the big shadow patterns seemed to be relatively successful? Why did the authors not focus exclusively on the patterns that 'work'? Did they test them? It would be nice to consult their historical examples but of course, they are no longer available.

What do these patterns have in common (or not have in common?)

Yes, I have a theory and yes, I'm going to update the front page of this thread to establish the first lemma in 'Clemmo's Canon' after supporting evidence from Shiller, Aronson, Brooks and Nekritin/Walters.

For now though, I'll let that percolate while I finish the remaining patterns and chapters in the book. Bonus points and prizes for anyone who wants to volunteer their own theories in the meantime.

Hi Clem, I found that Bird Watching in Lion Country was pretty decent.
Connie Browns books, while over priced, and not meant for novices, are also pretty good.
Welles Wilders seminal work is also quite good, as it dives deep into his formulas, and his formulas are the basis for most indicators today.

If I am adrift, or this is redundant, let me know and I will clean up this post.

Not at all, recommendations are welcomed! I will add these to the list.

Although Welles Wilder has written probably 1000 books. Which one is his 'seminal' opus?

Let's rush to wrap up 'Naked Forex' and get to the best part (maybe) their ideas about exits, which probably should have been moved to chapter 2 or even 1.

The next pattern is the 'Big Belt'.


The authors split the 'bearish big belt' and 'bullish big belt' into separate sections but they are simple inverses of the other. Pure publisher padding.

Fairly clear so far, I think?
Price has to 'gap' (although the authors don't use this word) up or down from the close of the previous bar and then move through the gap, closing it, and continuing to form a 'big' bar that nearly or completely engulfs the prior bar. That bar (the 'big belt' signal) must close near its high or low in the direction of the gap-closing move and preferably near a 'zone', with as much room to the left as possible. Entry and exit stops are placed at either end of the signal bar.

Look at how picky the authors are about the zone placement in this trade. It sure would be nice to have some absolute values for guidance.



edit: My hypothesis before testing is that this pattern will perform fairly well, much like the 'big shadow', and for similar reasons that have nothing to do with the pattern itself or zone placement.

EU daily shows 4 canonical trades with one failure. Note that if you don't enforce a strictly higher opening price versus the prior close (which I suspect isn't the salient factor here) you can find two more trades, both of which are winners.


UJ has only two canonical signals both winners.
If I expand signal criteria to simply 'big belt style' bars. We get 11 more signals, of which 7 are winners. That's 9/13 total or just under 70% win rate.

The relative success for this method varies drastically depending on where you place your zone exits however I intuitively feel this method is less uphill slogging than the kangaroo tail for example.

The last pattern in the book is called a 'trendy kangaroo' and it uses the 'kangaroo tail' but also seeks it out in a group of consolidated ranged bars.

I'm not even going to bother testing this, but I'll show you an example.


Boy, that signal bar sure pops out doesn't it? Not. Want another one?



The authors themselves admit that the 'trendy kangaroos' are 'not high probability' trades. So why bother? To pad out the book of course. This pattern has all the flaws of the original kangaroo tail with additional complexity and conditions to check for - not interested.

Chapter 11 Exits

Finally! The second most important part of trade management is getting handled at the end. Entries are third most important.

The authors recommend that you break each trade into six stages.


This all seems like solid advice. Maybe a little busy for the experienced trader, but if you're struggling you need to do the work.

Exiting
The authors take an interesting approach to exits and put all traders into two camps.

1. Runners
2. Gunners

Runners and gunners will never see eye to eye they say. Runners want 'the next big thing'. They want trades to run as far as possible and they aim for big wins. Gunners want wins. They want lots of consistent smaller wins and they want to avoid losing streaks.

In this case I would say I'm usually in the 'gunner' camp. However unlike the authors I think this choice should be system-dependent, not psychology dependent.

Gunner Exits

1. In and out quickly
2. Wins
3. Zone exits (what we've been doing)
   1. The market will often extend beyond a zone which is 'frustrating'. Nothing beats frustration like banked pips though.

   
   

4. Split Exit
   1. Divide the trade in two
   2. Exit early at the zone and then let the remainder run for the next zone
   3. Move to break-even once the market passes the first zone
   4. Attached Image

      

   
   

Runner Exits

1. Ladder Exit
   1. A trailing exit
   2. We still use zones for guides
   3. Move the SL to break-even as price passes into each zone
   4. Attached Image

      
      Patience needed
   5. Always have a 'cushion' of one zone
   6. Allows the market to come back and sometimes close for less profit which can be frustrating

   
   

2. Three-Bar Exit
   1. No zones!
   2. Trailing exit
   3. Take the lowest low or highest high of the past three bars and set your SL there
   4. The SL gets adjusted trailing behind the 3bar maxima/minima every new bar
   5. Attached Image

      
      Attached Image

      
      This is by far the most interesting approach of the ones presented, and I recommend that the enterprising trader who values anything in 'Naked Forex' go through some charts testing out how it performs. What if you use 5 bars? 7?
   6. Curiously the authors mention this exit may seem discouraging to 'gunners' as some trades will get cut short if the market isn't trending; but my thinking is if the market isn't trending why am I trading a trend-following system? I'd rather have my trade cut short a few times until I get a breakout.
   7. The authors are very generous with examples of this exit, for some reason showing dozens of examples. Maybe they realized the book isn't quite long enough yet.
   8. Attached Image

      
      Note that the SL isn't moved every bar. Only when a new higher high (for a short trade) or lower low (for a long trade) is printed within the most recent 3 candles.

   
   

The authors also deserve kudos for mentioning re-entries (the first most important part of managing a trade), which they call 're-trades'. However they only devote a couple of paragraphs to this idea and they only talk about one problem.

The problem is that traders struggling with an exit strategy will try to change things on their next trade, seeking to improve on the performance. This makes every trade different. This inconsistency is, as the authors point out - 'bad'.

"If you have found yourself adjusting your strategy in general, or changing your exit strategy in particular, based on what occurred in the previous trade, you are falling into this trap as well. Perhaps you take a trade and the market runs for several hundred pips in the expected direction, long after you have exited the trade. This may encourage you to change your exit strategy on the next trade. The problem with this is the next trade may not run for several hundred pips, and may only go to the next zone, which means that you will reduce your profitability even further."

The authors recommend picking one style -running or gunning, and sticking with that. I'm going to say, pick one system, and stick with that. Or better yet, enforce consistency with a machine.

The Cycle of Doom
What happens if you don't stay true to your trading beliefs and 're-trade' every trade? You fall into the cycle of doom!
Doom!

And that brings us to section three - the chapter on trading psychology. However if you know my attitudes towards trading psychology you know that I think it's mostly a sham. If your system works you will intuitively feel it and begin to trust it. If you are continually betrayed, your emotions are very good at telling you that something is bogus. You don't need psychological tempering to succeed because nothing succeeds like success. Of course, I'm in the minority in this and so if you'd like to know what Nekritin and Walters have to say about psychology I encourage you to buy this book.

So now the riddle of steel. What made those successful patterns successful? Was it the pattern, seen by thousands of traders who were looking for it? Was it the mystical power of the candlestick? The occult power of shadows?!

Does anyone want to take a crack at it before I post my conclusions on the first page?

That also brings to a conclusion 'Naked Forex'. How many books have we done? If you count courses and websites, I think it's about #8?

What's next? A book on the current reading list? Or shuffle and do another poll? I will say that I'm going to start narrowing down the types of books we review as we draw conclusions based on past data. That means some books that have been recommended will be set aside in favour of unexplored territory.

This intermission also gives me a chance to say something about Clemmo's Conjecture. You might recall it states that wherever a large concentration of traders are interested in something, the value of that something declines inversely in proportion to its popularity.

Simply put, the more popular a system, thread or book about trading is, the less useful it is. The reverse is also true. The most valuable systems, books and forum threads are usually ignored entirely.

Now look at the poll results for the books in the current poll.

Not putting up very big numbers overall, which is good for us.
Now I started with the two books that got the most votes - Naked Forex and the Al Brooks books. Both of them were a bit of a disappointment.

Naked Forex gave us an interesting exit method and accidentally got a couple of things right, but needed a bunch of house rules to be useful to anyone. That would be tricky for any neophyte trader to navigate.

Al Brooks is just loonie and if anyone gets something from him, it's again, because of their own ingenuity not his excellent instruction.

Yet both of those books are the most popular. Next in line, is the Forex Hero pamphlet. I wonder what attracted people to this. Was it the word, 'ultimate'? It does have some good beginner material which is why I included it. I think I thought I was going to start with it. It's definitely better than Babypips and far more concise, but it's basically just sales funnel bait for new traders. I'll review it soon.

Last on the voting list? The Profit Magic of Stock Transaction Timing by JM Hurst. One of the few trading books that actually contributes novel scientific ideas to the profession of trading since Livermore and Gann. A book that has more intriguing ideas packed into it in any individual chapter than either of those others combined. One vote.

So you see, even in this small, and admittedly unscientific study, seeing what people are interested in is a good way to know what's promising and what's probably not. Avoid the crowd, but trade the trend.

New concepts in technical trading systems. Written in 1974.

I'm really enjoying this thread. I love the fact that you keep a critical approach, questioning each supposed trading truth delivered by your readings.


May I suggest you Universal Principes of Successful Trading by Brent Penfold ? One of the best trading book I have read so far, it really deserves your attention.