Anatomy of a Trade Well Made

I combined the teachings of two geniuses a world apart to come up with the winning trades I made in TVIX and VXX last week. Both of these instruments are plays on market volatility.

If you have followed the Gerritz InSights blog for a period of time, you have heard me talk of Pascal Willain and his Effective Volume indicator. I don't believe I had previously mentioned that he resides in Waterloo, Belgium, where French is spoken. His English is far from perfect, but he is getting better all the time.

You have also heard me talk about octogenarian, Ian Woodward, master market technician, HGS Investors group mentor and creator of what is now affectionately being referred to as the Woody indicator.

Each of these gentlemen have very different investment methodologies. By combining the teachings and creations of these two extraordinary men I believe we can gain a significant edge in the market.

Ian's focus is on keeping us on the right side of the market. He is the developer of what I call our Daily Market Snapshot and our Market Direction Model. Ian's methods are derived from an enhancement of the ideas put forth by the legendary John Bollinger and his Bollinger Bands concept. I was told that Ian had lunch with John last week to show off his new Woody Indicator; they both live in Palos Verdes. Evidently John liked it very much.

Well in a nutshell, here it is. The Woody indicator gave us early clues that volatility was creeping back into the market. It signaled me to buy protection quickly.

The Woody Indicator

Analysis of TVIX

As the data point numbers change, the colors change.
The arrows are pointing  to the column that generates
our buy and sell signals.

This is what the Woody Indicator looks like in a chart format.

The thin blue line in the chart below is the Woody Indicator. It enhances and magnifies the subtitles in market movement and investor behavior. It can get us in earlier and out sooner, and it is very easy to read.

Notice how dramtically and fast the thin blue line moves. I have not found
anything as effective.

TVIX and its non-leveraged sibling VXX are powerful hedging tools in the right hands. I might add the admonishment, don't try this at home.

Paul Grems Duncan, forum leader for Effective Volume and HGSI group member as well, pointed out the advantages of adding an additional step to trade analysis before taking the leap. He uses Effective Volume Money Flow to see if there is a divergence between the buying patterns of the large players (institutional investors) and the small players (individual investors).  In this particular case there was a  huge divergence. The large player were rushing to buy VXX, while the small player remained oblivious as usual. The following EV Chart speaks for itself.

Effective Volume Money Flow

This is quite compelling. The big boys are buying while the little guys are selling.
Who do you think is going to win?

The VXX and TVIX trades made roughly 10 and 20 % respectively. These trades proved to be effective hedges to our other positions when the market was falling pretty hard at the end of the week. Not only that, but these indicators have provided us with an early warning of a potential pullback or correction coming our way.