My #1 Recommendation

November 30, 2006

The longer I trade, the more I'm convinced that if you concentrate on trading only one Forex currency pair, you'll be more successful.  What has convinced me of this?

I concentrate most of my time looking at GBP/USD charts because my system only trades this Forex currency pair.  I do look at other currency pair charts but not as frequently.  I'm convinced that each pair has their own personality.  If you concentrate your efforts on learning its "personality" above all others, you will feel much more comfortable with the price movement associated with this currency pair.  I visited the currency personality subject several times in the past and SFO Magazine attributed the followed characteristics to the GBP/USD:

  1. Reaction to US and UK fundamental data
  2. Price action has a one-way tendency during larger moves
  3. More proactive risk management
  4. Watch short-term false breaks of chart levels
  5. Focus on charts > 240-minutes
  6. For those positioned with a move, trailing stops with Parabolic SAR are well suited
  7. Longer-period oscillators can be used to highlight potential reversals or divergent price action
  8. Momentum signals should be confirmed by break of trendlines, Fibonacci retracements, or parabolic levels
  9. Frequently exceed 61.8 retrace, only to stall at 76.4 level.
  10. Williams %R is well suited with overbought/oversold bands adjusted to -10/-90

You can find the 2 posts where I talk about this below:

Currency Personalities Revisited

Personality Characteristics of the GBP/USD

As you get to know something or someone more, things that you never saw before will be revealed.

I'm not saying that I hold the secrets of the GBP/USD.  I think right now it's more of a comfort thing than anything else.  Over the last 3 months though, if I throw out all other trades that didn't include the GBP/USD, I would have rid myself of 200 pips of losses.  Therefore it would have been more profitable for me to just trade the GBP/USD and no other currency pairs.

Forex Trading in the Black

November 29, 2006

Ending the month with a profit gives me a feeling of progress and success.  It is nothing more than that though because what your P/L is at the end of the month doesn't matter in comparison to what you've done in the previous 6 months, 1 year, or more. 

With 1 day left in the month though, I have exactly 40 pips of profit for November.  It's funny that after having 30+ managed positions opened this month, my 1 position last night which profited 78 pips pushed me into profitability.  In fact, there were several times this month where my P/L was back to 0.  This is just the way things work.  You can put tons of time and effort into trading and after managing multiple positions during the month, you might wind up right where you started.  It's obviously better than losing though.  Either way, sometimes things work out and sometimes not.  I think the more trades I place, (as long as they are "good" trades where I did not deviate from my plan) the more beneficial is to me as a trader.  If I made 1 trade this month that profited 300 pips and that was it, I don't think I would be furthering my chances of becoming a day trader.  I'd much rather be at +40 pips after 32 trades this month than up 300 pips (if I had only made 1 trade.) If I was a longer term trader, 1 trade for the month might be fine but that's not what my goal is here. 

You can see my past and present performance at http://www.forexproject.com/My_Forex_Goal.

I know there is still 1 trading day left but I will trade Thursday even if it means finishing with a negative P/L.  If I do finish with a positive P/L though, that would be 3 consecutive profitable months.  In September, I ended with a profit of 286 pips and in October with a profit of 447 pips.  Since tracking this run of performance results since June of this year, my total P/L is at 477 pips.  When you really put it in perspective, 477 pips over 6 months is not going to win me any contests or get me out of corporate America but I'm inexperienced and I'll just have to tag myself this way until I get a couple of more years under my belt.  If anything, this only proves how difficult Forex trading is and I've dedicated tons of effort towards doing this.  

Buy and Hold

November 28, 2006

The next couple of weeks, I'm going to try to put the spotlight on backtesting similar to what I did with money management a couple of weeks ago.  I'm going to bounce around the subject in no particular order but hopefully we'll all get something out of it. 

No matter what anyone says, I feel that backtesting is a very important part of trading.  I'd be very hesitant to jump into the market with a system that was never backtested and even though profitable backtested results don't guarantee future profitable results, backtesting will also help you become more familiarized with your system.   

Most trading software contains backtesting functionality built in and I've checked most of them out including eSignal, Metastock, Metatrader, Intellichart, and Amibroker.   Getting into detail is for another time but I just wanted you to see that you have a lot of options.  Most of these require some programming knowledge which is a limitation that some of you may have but you always have the option to manually backtest.  Unfortunately, manually going back in your charts is a very arduous and monotonous task.  In addition, sometimes you become very biased towards your system where you see only what you want to see. 

In its most simplistic form, backtesting is the process of going back in time and finding each and every trade signal that your system would have generated.  Using your profit target, stop loss, and additional money management rules, you will compile a list of both your profitable and unprofitable trades.  These can be further broken down into profitable long trades, profitable short trades, unprofitable long trades, and unprofitable short trades.

This brings me to a backtesting component that maybe some of you have or have not heard of which is the buy and hold strategy.  A buy and hold strategy assumes that you buy at the beginning date of your backtesting and hold the position until the last date of your backtesting.  The buy and hold profit is calculated by using the price on the first day and the price on the last day.  This will tell you how much you would have made or lost if you made one trade, opening it on the first day and closing it on the last.  What does this have to do with your trading systems backtesting results?  Ideally, your trading system backtesting should produce higher profits than the buy and hold strategy would have.  If this is not the case, trading your system would not have been worth the time or effort.  This is just one minor way to gauge how good your trading system was in the past and it's worth calculating because it's very simple to do. 

State of My Trading

November 28, 2006

I've been keeping busy and trading.  With 2 days left in November, I'm down 38 pips.  This really isn't that bad considering how disorganized my trading has been this month.  Specifically, I've been trying to discretionary trade for a couple of weeks and this has proven to be a work in progress.  For instance, yesterday I tried and tried to get short on the USD/JPY but after much work, I wound up down over 100 pips.  I was off from work yesterday and kept my eye on the USD/JPY chart most of the day and night.  Before going to bed, I put my orders in for any possible H-system trades that may occur during the European session.  A trade did trigger and I quickly profited 90 pips.  The physical and mental work that went into the failed USD/JPY trades was just so overwhelming compared to the semi-systematic H-system trading system.   

I'm learning that I'm terrible trend trader and my discretionary trading certainly needs work.  The longer I trade, the more I realize that there may be a limited number of systems or methods that fit me best.   I'll just have to continue the exploration to see all of my options or my limited options.

Should I Buy A Forex Trading System?

November 25, 2006

I've already did but should you buy a forex trading system?

I have to admit that I was guilty of buying a trading system when I first started trading over a year ago.  I bought the Alba system that's offered by the Pippin Ain't Easy site, which I believe is affiliated with Baby Pips.  I never used it.  But I cannot say I didn't learn anything from it.  I learned that you can last longer in this business if you follow a system with rules.  They can include both systematic or discretionary rules.  I said you can last longer; I didn't say you could be successful.  I wouldn't know anything about success because I haven't been trading Forex long enough to qualify for this title.   I'm going to tell you what I think is the #1 way to last as long as possible until you can gain the experience needed that may or may not guarantee success….

Do not trade on impulse.   That's it.  I have traded on impulse in the past and it is a great way to give your money away in a heartbeat.  You'll find that one impulse trade can quickly lead to another and another; literally a snowball effect.  I no longer trade on impulse because I have restraint.  I know that if I ever do impulse trade again, it could be an end to the Forex project.

Let me give you two reasons why you might want to buy a forex trading system? 

  1. If additional education comes with this system that guides you in constructing your own trading system, then it may be worth it.  Some mentors will give you explicit trading system rules but will assist you in molding it to your personality.
  2. You can learn something from this system that you never thought about.  Someone who sells forex trading systems recently sent me their's for free.  They were attempting to post a comment on the site that really just advertised their system which I would never approve.  I kindly asked them for it for free so that I can take a look at it.  I told them that if I found it at all educational, I would state that in one of my posts.  Surprisingly I did find something interesting in it that I never thought about.  This may not be useful to me now but it is yet another piece of information that I might be able to construct into something useful in the future.  I'm not sure that this piece of information though was worth what they were selling the system for.  

Why shouldn't you buy a forex trading system? 

  1. There are so many free trading systems out there.  These systems are supported and tried by many other traders who share their success or failure with it on forums.
  2. You can create your own.  It isn't easy finding a system with an edge.  I still don't think I have a system with an edge to make it but I'm always searching.  In addition, if you created it, you'll trust it more than any other system and you'll learn to live with the results win or lose. 
  3. This system isn't customized to your personality or needs.  If this system traded strictly during the European session and you're asleep during this time, how will you ever find the time to trade it?
  4. Just because this trading system works for them doesn't mean it will work for you.

So I can't tell you that you should or shouldn't buy a trading system.  If you do buy a trading system and it helps you further your education as a trader then it was worth it.  I would tell you to be careful with what you pay for because everyone and their mother is selling a system with testimonials of huge profits.

Interactive Brokers

November 23, 2006

Interactive Brokers offers direct market access for all Forex instruments (spot, Globex futures, listed FX options) as well as equity and commodity products on 57 exchanges worldwide. Our interface offers 20+ order types, lowest commission model, and best execution order routing. Our services are optimized for professional and institutional traders with EUR.USD and USD.JPY pairs as tight as 0.5 pips (0.00005) on orders from 25'000 to 30 million. Typical spreads for other markets to USD are 1-3 pips.

IB acts as pure agent. To ensure our market neutrality and avoid conflicts of interest, we do not take the other side of the order like most FCM platforms. By structuring our FX platform like an ECN — with a consolidated (and visible) deep book — our business is solely to provide the best and fastest possible execution to professional traders, funds, and institutions.

Charts, API programmability, access to real-time news, and much more.

Oanda

November 23, 2006

Comprehensive provider of foreign exchange, currency trading, and information services.  Read more for Editor's Review.

Which Forex Brokers Ranked Highest

November 22, 2006

I just received the new Special Traders' Issue of Stock & Commodities Magazine ; they announce their 2006 Reader's Choice Awards.

The results for the forex brokerages ranked highest by readers:

Winner: Interactive Brokers

First Runner-Up: FXCM

Finalists: GFT Forex, Man Financial, and XPRESSTRADE

Semi-Finalists: FX Solutions and GAIN Capital

Honorable Mention: AlaronFX, CMC Forex, CMS Forex, and Lind-Waldock 

Interesting results because I never really heard of Interactive Brokers…

Free Trading Books

November 22, 2006

I was reading about a little known trendline trick at swing-trade-stocks.com which states, "in an uptrend, if a higher high is made but fails to carry through,
and then prices drop below the previous high, then the trend is apt to
reverse."  Though this information may seem obvious, I still find it valuable.  I looked back at the 240 minute EUR/USD chart and noticed that more often than not, this is the case.  Why? 

"…the locals as well as the brokers who trade on their own account
have a vested interest in driving prices slightly above or below these
"resistance" or "support" points to force execution of the stop loss
orders. This is called "taking out the stops." After the stops are
executed, the market will readjust."

This information was provided by a trader (Trader Vic) who was featured in the popular "Market Wizards" books.  This leads me to how you can get free trading book content.  The above "trendline trick" is just one of three of Trader Vic's criteria for a trend change.  I wanted to find out the other two criteria.  I easily found it by searching for the book "Trader Vic" at Google's Book Search.  The entire book isn't provided but a lot of content from the book is.  This is the case for many more trading books.  I've said it before but sometimes a tidbit of information can go a long way and there is a lot more than a tidbit of information at http://books.google.com.   Search for Forex and you'll find a lot of books on the subject, just be sure to skip over the "Forex Made Easy" book by James Dicks.

What are the 3 criteria for trend change? (Provided by the book, "Trader Vic–Methods of a Wall Street Master")

  1. break in the trend line
  2. test of preceding high or low
  3. breaking of a preceding minor rally high or minor sell-off low

Rule 2b is actually the trendline trick mentioned above.

Here is a graphic corresponding to the 3 criteria for trend change:

trendchange

 

 

 

 

 

 

I Blinked and Missed It All

November 22, 2006

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I didn't open my charts last night but this morning was amazed at the moves the market is making.  I guess amazed isn't really the word… It's really that feeling you get when you really missed out on something big.  Yesterday, I decided to put trading off until next week.  Unfortunately I missed out on a huge H-system trade today and others.  I guess in hindsight it's easy to say what could have been but it certainly is frustrating.  In fact, there is nothing that burns me up more than when something like this happens.  It just goes to show how I really have to put the following phrases out of my head:

  1. "I think the market is going to…"
  2. "There is no way the market is going to…"

There is no predicting what's going to happen next with anything.  I think it's better to just go by what the data is giving you at this very moment and make a decision based on that.  

 

 

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