SH's trading the 'greater fool' zone

#1
Hi Friends,

I am posting one of the strategies that I trade. This strategy is used to identify extremities of the markets (called greater fool's zone) and then trading them. This was introduced to me by Dr Alexander Elder and helps in:

1. Booking profits on exiting positions when the markets enter the greater fool zone &

2. Taking contrarion positions to the trend to hedge existing positions or taking absolutely a naked contrarion trade.

This strategy can also be combined with my already discussed strategy on 315 (identify when to book/lock in profits or hedge them once the markets move in our favour)

It can also be used with my 'Market correction prediction' theory to take contrarion trades.

Following posts would explain the strategy with examples.

Hope this helps in your trading results.

Cheers
SH
 
#4
Hi SH,

Can you share the book's name. I would like to go through the whole text to understand various strategies.

On the other hand I respect your dedication in spreading the information to fellow members. Wish you all the success.

Thanks,
AC
 
#5
OK ..now coming to explaining what I mean by 'the greater fool zone'.

Markets do not stay in the state of equilibrium at all time, there are instances when markets suddenly run up very fast in a state of hysteria or crash very fast in a state of panic. A smart trader would usually be long before the hysteria kicks in and the markets zoom up or will be short before the panic sets in and market crashes (like in my 315 strategy where we enter before hysteria or panic sets in).

Once the markets reach a point where culmination of hysteria or panic happens, that zone is called the 'greater fool's zone. This is because a smart trader would like to exit their profitable positions in that zone and hopefully will find a 'fool' who will be ready to carry the trade forward (please don't get offended by the word 'fool' its just metaphorically used by Elder). The 'fool' would take the position in that zone hoping that a 'greater fool' will come at some point and will let the 'fool' exit with profits. What usually happens in markets start reversing from that point and the smart trader ends up with profits.

Now the million dollar question is 'how to find these culmination points where the trend usually finishes and reversal happens' ?? It's a million dollar question because its like trying to find tops and bottoms in markets which goes against the very nature of trend trading.

However a lot of traders try to find such points or zones with the help of various tools like looking at historic supports and resistances, using RSI etc to find overbought/oversold zones or some even use EW, Wolfe or Fibo.

I was personally very impressed by what Dr Elder suggested as a tool to spot these 'greater fool's zones' using Moving Averages (As you would have already understood my eternal love towards price and moving averages - nothing else appeals to me) :lol:

Next posts would explain the basic strategy and how to apply them to Indian markets, different scrips and potentially different time frames.

Cheers
SH
 
#6
Hi SH,

Can you share the book's name. I would like to go through the whole text to understand various strategies.

On the other hand I respect your dedication in spreading the information to fellow members. Wish you all the success.

Thanks,
AC
The one and only book which I have ever read and I believe is enough for anyone is reading 'Come into my trading room' by Dr Alexander Elder. Focus more on psychology and money management and market behavious instead of strategies. Once you have understood these, you will end up devising your own strategies and trading plans.

Cheers
SH
 
#7
OK now ... how to create the 'greater fool's zone' for Indian markets?

What we need is an ability to draw up Moving Average envelopes around price charts. This is a normal indicator available on normal charting softwares and websites. I use Icharts.

Moving Average envelope is nothing but plotting an upper level and a lower level band around a particular moving average (much like bollinger bands). The zone falling within the envelop are called the 'traders zone' while zones outside the envelope is called 'Greater fool's zone'.

Different scrips and different timeframes require different width size of the envelope (defined as % points from the MA)

for example if we build a 10% envelope around 20 SMA on Reliance daily charts, it will plot levels 10% above and lower than 20 SMA on a daily basis. a contineous plotting will appear like a band (example chart attached).

Cardinal rules to build an effective envelope

Irrespective of which scrip or timeframe you want to build the envelope, you need to ensure:

1. The envelope has around 95% candles falling within the envelope &
2. approximately 5% candles outside of the envelope.

Above two conditions would define the width of the effective envelope.

How to trade 'greater fool's zone once we have built an effective envelope?

If we are in longs (for example based on 315 strategy), if we see the daily candle touching the upper band of the envelope (or going beyond it due to gap up) we can:

1. Hedge longs by buying some puts and wait for 15 EMA touch OR
2. Book longs completely and buy some calls in case the hysteria continues. We enter longs in futures again at 15 EMA touch
3. If the price we way outside the envelope, we exit long positions in futures/calls and open contrarion trades (open shorts or buy puts) and carry them as naked positions until 15 EMA is touched.

Visa versa for short positions.

I am attaching Nifty EOD charts, the effective envelope uses a 6% envelope against 17 SMA as it ensures only 5% candles are outside the envelope. We need atleast 250-300 candles to look back upon so I have chosed last 1 year chart.

I have also marked the 'greater fool's zone' where the trades as explained above could have been entered. (assume original positions based on 315)

Please review and let me know your thoughts. In coming days, I will post about other scrips and other timeframes except EOD.

http://img231.imageshack.us/img231/7496/niftyeod6envelope.jpg

Cheers
SH
 

rkkarnani

Well-Known Member
#8
OK now ... how to create the 'greater fool's zone' for Indian markets?

What we need is an ability to draw up Moving Average envelopes around price charts. This is a normal indicator available on normal charting softwares and websites. I use Icharts.

Moving Average envelope is nothing but plotting an upper level and a lower level band around a particular moving average (much like bollinger bands). The zone falling within the envelop are called the 'traders zone' while zones outside the envelope is called 'Greater fool's zone'.

Different scrips and different timeframes require different width size of the envelope (defined as % points from the MA)

for example if we build a 10% envelope around 20 SMA on Reliance daily charts, it will plot levels 10% above and lower than 20 SMA on a daily basis. a contineous plotting will appear like a band (example chart attached).

Cardinal rules to build an effective envelope

Irrespective of which scrip or timeframe you want to build the envelope, you need to ensure:

1. The envelope has around 95% candles falling within the envelope &
2. approximately 5% candles outside of the envelope.

Above two conditions would define the width of the effective envelope.

How to trade 'greater fool's zone once we have built an effective envelope?

If we are in longs (for example based on 315 strategy), if we see the daily candle touching the upper band of the envelope (or going beyond it due to gap up) we can:

1. Hedge longs by buying some puts and wait for 15 EMA touch OR
2. Book longs completely and buy some calls in case the hysteria continues. We enter longs in futures again at 15 EMA touch
3. If the price we way outside the envelope, we exit long positions in futures/calls and open contrarion trades (open shorts or buy puts) and carry them as naked positions until 15 EMA is touched.

Visa versa for short positions.

I am attaching Nifty EOD charts, the effective envelope uses a 6% envelope against 17 SMA as it ensures only 5% candles are outside the envelope. We need atleast 250-300 candles to look back upon so I have chosed last 1 year chart.

I have also marked the 'greater fool's zone' where the trades as explained above could have been entered. (assume original positions based on 315)

Please review and let me know your thoughts. In coming days, I will post about other scrips and other timeframes except EOD.

http://img231.imageshack.us/img231/7496/niftyeod6envelope.jpg

Cheers
SH


Thanks for this initiative!!! BTW, instead of inserting the URL if you use "Insert Image" it will be displayed in the Post. You might have done it many times but just in case it might have skipped your mind hence a gentle reminder!!
 
#9


Thanks for this initiative!!! BTW, instead of inserting the URL if you use "Insert Image" it will be displayed in the Post. You might have done it many times but just in case it might have skipped your mind hence a gentle reminder!!
rkkarnani - I am new to imageshack... i have used all my quote to post charts here hence went to imageshack... are you saying i can insert image through imageshack without exceeding my quota on traderji?
 

rkkarnani

Well-Known Member
#10
rkkarnani - I am new to imageshack... i have used all my quote to post charts here hence went to imageshack... are you saying i can insert image through imageshack without exceeding my quota on traderji?
Yes you can insert image without it being counted in your Traderji Quota!! :)
When you upload on Imageshack it does not count in your Traderji attachemnts quotas ... you are not using Traderji Space!!! :D You are just posting the link from Imageshack that displays the image in Forum!!
 

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