AT THE CLOSE What do you think of when you think "cocoon"? Is it small, fetal, round, cozy ... formative? When trader Kenneth Branch uses the term, more often than not he uses it in regard to trading, in reference to the growing forces within the markets. He looks for tradable financial instruments while they are still in the forming stage, covered by a "protective covering" of sorts until they are ready to burst forth in full flower. As he explains it, in the cocoon stage of market development, "there is a supply of any given security that may be purchased at low prices" before most of the market finds out about it. And it's worked for him, because the tradables he finds at that point can be had at attractively low prices.
Branch has taken a different approach to trading than most. He was convicted of drug-related charges at 18, and it was during his 12-year stay in federal prison that he began to study the markets, in particular reading Stan Weinstein's Secrets For Profiting In Bull And Bear Markets. For six years he manually charted index and stock activity, and from there he began to recognize technical patterns, subsequently developing daily trading models based on indicators. After his release at 30, he started Lanham, MD-based Cocoon Trade.
The result of more than eight years of in-depth analysis, his Buttafli9 system indicates a move when intermarket correlations appear to go "out of whack," Branch explains, "signaling a possible reversible move." Of the two models available in Buttafli9, the first is a ratio analysis analyzing relationships between indexes and stocks, while the second model examines momentum in an attempt to measure the strength of a move.
From his intraday, daily, and weekly charts, the models generate as many as 45 signals per month, and these trades last about two hours from entry to exit. Not only that, due to customer requests, Branch has expanded his techniques to include corn, wheat, oil, and gold.
To keep track of his trades and the markets' activity, Branch used to get up at the crack of dawn at 5 am to check how the overnight futures trades went and to analyze and predict how the market will open in the US. These days, however, he gets up before the crack of dawn to monitor the increased volatility caused by the opening of the European markets. He continues his analysis throughout the day, and after the markets close.
For Kenneth Branch, the concept of "cocoon trading" means identifying tradables that are in the formative stage, when they could be bought at low prices and at ample supply. And all those cocoons can turn into beautiful "buttafli9s."
Marge Sherald is chief operating officer of Ward Systems Group, which has been dedicated to artificial intelligence and trading software since 1988. She is the author of multiple articles on expert systems, neural networks, and financial forecasting.
RELATED READING
Sherald, Marge [2002]. "Trading Fuzzy Patterns," Technical Analysis of STOCKS & COMMODITIES, Volume 20: September.
_____ [2005]. "Turbocharge It! A Genetic Approach To Turbocharge Your Profits," Technical Analysis of STOCKS & COMMODITIES, Volume 23: August.
- www.neuroshell.com
- www.cocoontrade.com
Return to August 2006 Contents Originally published in the August 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.