I Suck At Technical Analysis

I like posting email's or comments from other traders that I receive because I find the information many times insightful and refreshing.  Here's one such email I received yesterday from a visitor that wishes to remain anonymous.

I don't trade the news instantly for the obvious reasons; widened spreads, dodgy broker activities, its just not worth it.   i'll take a position 10 minutes or so after the news is digested.  I'll give you a perfect example of a trade i did earlier this year where i made a lot of money.  When the BOE raised rates to 5.25% the pound went through the roof, over 120 pips (i think)… but look what happened right afterwards a huge selloff - which is clearly, people either

1. taking quick profits
2. people who were short and just got nailed

However, the fundamentals did not change.  I kept saying to myself the BOE just did a surprise interest rate announcement.  I rode that announcement up to 1.99, got out around 1.98 when all the drama about the close vote came through.  During the runup to 1.99, there were some ups and downs (people taking profits, corrections) but the fundamentals never changed.  In hindsight i was hoping for 2.00 break which would have been very interesting and it was only 80 pips away or something.  Then you look at the initial rundown from 1.99 - 1.92… the BOE has a close vote, int.rate future uncertain, then you have all the poor UK inflation, then BOE holds rates again its all right there in the chart.  This really helped my trading.  Take a 60 minute chart for the week, take all the economic announcements/daily reports and write in, when each of them happened.  Dailyfx does this at the beginning of each week.  It's very helpful.  When you do that… your labels will generally be beside large bars/candles, then you can see the corrections, the movements back down/or up and watch the times they happen, you'll see how fundamentals shape the market. 

Using a current example, I'm currently long eur/jpy and have been since Monday.  Yesterday there was a huge selloff because the Bank of China said they won't accumulate more reserves, so all this fear entered the market., I saw my 100 pip profit whittle down to basically nothing.  But I didn't get out, because I relaxed and asked myself:

1. Is this enough to alter the outlook?
2. Does this change the fundamentals right now?
3. Will hedge funds/banks etc. give up their carry trades for this?

I said no, the EUR/JPY is now back up to its prior levels.  I could have been wrong, sure, but at least it was my decision not the decision of a moving average/stochastics etc.  The reason why i don't like moving averages in particular and a lot of technical analysis is that while yes they can work, you gotta remember big banks/hedge funds have these tools as well.  They know how the small guys trade.  They have the capital to push prices down knowing a MA cross will occur, and then they will just reverse and continue the trade in the fundamental direction.  My biggest problem as a trader are entry points.   I work really hard on technical analysis but honestly, I suck.  Technical analysis is not useless don't get me wrong.  I've been checking that Ed Mamula blog and I'm sitting here like "is this guy for real" cause that's crazy and very admirable.  I'd say on a fundamental basis I'm right 80% of the time.  Economics in Forex is not hard.  The sick reality of Forex is that you need capital and lots of it.  The worst feeling in the world is being right but still losing money.  Look at your losses.  How many times would you have been right if you just could afford to have bigger losses.  I mean if you're wrong, you're wrong.  I'd suggest really looking at your losses (not those Lien & Boris ones) and ask yourself, was "I right" fundamentally… one/two days later. 

In the New Market Wizards, they interview Bill Lipschultz, one of the most famous currency traders ever.  He said something so eye opening i never thought of.  Think about an investment bank… they get an order to buy 300 million euro/yen, they fill the order at a huge spread (profit right there), the order goes through, knowing an order of that magnitude will move the market, they take the same position and piggyback.  Front running is LEGAL in Forex.  Think about that concept.  Like i said, I'm not so successful at this that I can do it for a living (I WISH).  I love the markets but know where i stand in the big picture.  I know my orders don't reach the interbank market and I know i'm trading against my broker.  I do my best and get really frustrated when I was right but my capital can't sustain my positions.  I'd say maybe to improve your returns always focus on three things:

1. INTEREST RATES - why do you think the pound has been so choppy…because there is no clear indication anymore about interest rates.  Look at the Aussie dollar recently at 10 year highs… Why?   Keep raising int.rates indicating more could be on the way.  Look at the euro… talk of 4.00% maybe more.
2. WATCH CNBC (I'm serious) Like i mentioned previously, I made a killing shorting the yen at the end of February.  Technical analysis did not matter, nothing mattered.  It was all over the t.v., in the newspapers;  "the world is coming to an end!!!" Risk aversion blah blah… It was the first time i ever traded the eur/jpy cross but i didn't care that i had no history with the pair.  It was the easiest bet this year.  I just wish had the capital to trade gbp/jpy as well…. 
3. Maybe try making a decision (keep a chart) of in your mind what the currency's should be doing based on your fundamental analysis.  Once you come to a decision stick with it, until you feel the fundamentals have changed.  Fundamentals do not change from some random news headline, or report.  They change over time.  For example, right now i will NEVER short eur/usd.   I don't care if it goes all the way back down to 1.29.  I will only BUY.  If you're asking the question, should i buy/should I sell, you shouldn't be making a trade, period.  Last week, the easiest pair to trade was usd/jpy.  Why???  On CNBC, they continually talked about how if the DOW is moving up, it must because the yen is weakening and vice versa.  I really do believe the only advantage of investment banks have over us is:

1.  They have more capital
2.  They know when big orders are being placed
3.  They have the luxury of knowing where orders are

Look at the eur/jpy, gbp/jpy, aud/jpy, nzd/jpy crosses this week, the calm is back.  There's worries about subprime but equity markets have been up most days.  Carry traders want their interest.   Don't lose sight of that, until you read about another massive selloff in Asia, or about a few mortgage lenders in the states actually going under you, should buy these currencies against the yen.

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