Light Trading this Week

After my big losses on Sunday/Monday, I decided to take a bit of a break and to just watch the price action.  My posts have been limited this week as a result of this.  I’ll get back into the swing of things this weekend. 

I feel it necessary to mention another article I’ve read this week.  This article relates to Andrew’s Pitchfork.  This indicator can be compared to support and resistance lines and offers both of these lines as well as a middle line that servers as a pseudo-regression line.  Dr. Alan Andrews believed that 80% of all price action would gravitate towards this middle line with the other 20% accounting for wild price swings.  By using Andrew’s Pitchfork in combination with other indicators, a trader may be able to increase their accuracy.  Read the article, "Make Sharp Trades Using Andrew’s Pitchfork."

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Determine Price Action Using Channels

I read a decent article today about Donchian and Keltner Channels.  I’ve had limited  experience with both of them in the past but after reading this article, I really can see their usefulness. 

The Donchian Channel indicator, sometimes referred to as the Moving Average Indicator is used to capture short-term bursts or longer-term trends.  Quite simply, when price action breaks through (and closes) above the upper band, a buy signal is created.  When price action breaks through (and closes) below the lower band, a sell signal is created.  This indicator works a little different than one might think because when the price breaks a lower or upper band, THIS DOES NOT SIGNAL A REVERSAL.  This actually signals a new trend establishing itself.  As with all indicators, Donchian channels should be used with other confirmation indicators.

The Keltner Channel is a reversal indicator.  It looks similar to a Bollinger Band except that it uses high and low prices to represent volatility instead of standard deviation.  If price action breaks above the band, traders should consider shorts.  If price action breaks below the band, traders should consider longs. 

Here is an actual example using a current JPY 60-minute chart.  This example shows sell signals being created from the Keltner Channel.

 

 

 

 
After looking for an example where a Donchian Channel generated a buy/sell signal, I’ve given up.  Can anyone find where an upper or lower band was violated by a closing price.  I cannot.

The full article can be viewed at http://www.investopedia.com/articles/forex/06/BandsChannels.asp.

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Forex Trading Lesson

This is an excerpt from a comment made by Sam Shenker at http://www.dailyfx.com.

As a trader one of the lessons I learned the hard way is to never to be eager to enter the market. Eagerness tends to lead to excitement and in turn it tends to cloud rational thinking, which can lead to a loss or a series of losses.  The trader did not allow him or herself enough time to assess the market for potential trades and just entered the market because it’s moving.  The trader does not want to be left behind. Its ok to miss a trade.  In order to be successful, a trader must learn how to control his or her emotions, never be eager to establish positions and never enter the market on a whim, just because it’s moving. Trader’s strongest asset is patience to wait for a high probability setup to materialize, because if the trader is not patient, he or she will not be trading for very long. If you feel the urge to trade just because you are bored, get a cheaper hobby. Be patient and listen to the market and you will be successful. PATIENCE IS A CORNERSTONE OF SUCCESS FOR A TRADER. 

I tend to get a bit excited when the market gets moving.  The advice above is valuable especially the advice to get a cheaper hobby if you trade due to boredom.

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Risk Reward and Trading for a living

These were comments posted by Greg and Blackday, both of them more experienced traders.  In addition, it should give us motivation to strive towards our goal.  Blackday has been trading full-time for 8 years now! (Thanks Guys)

Blackday: "The turning point at which trading became successful for me began when I placed my stop and target an equal distance spread from the spot price. I bought the risers and sold the sinkers … I have never once looked back."

Greg: "I’m familiar with the stop loss/target stategy you use. What you also do with your decision-making is consider risk to reward ratio very carefully. Agree?"

Blackday: "In reality, risk and reward are equal measures for it is a wizard that would be able to tell you with absolute certainty where the market will end up. By placing a target and stop loss an equal distance away, we are then left with the decision on our preferred direction.

Let us all for one moment forget about why the market is moving today and instead concentrate on where the market is heading. How can we find this out? First we must look at the historical price action on our choosen time frame right up to the current spot price, for it is here that we find the strongest clue for our entry. Then we must pick up the trend and run with it. For clarity, remove all chart studies and indicators from the screen save Fibonacci levels and trendlines, keep watching price action. Make your entry and note the price formation as it takes shape (higher highs + lower lows for longs, lower lows + lower highs for shorts), look to previous tops and bottoms and use them as intermediate targets if they appear before your own target level and use them to adjust your stop loss.

Now we can switch our attention to why the market is moving and continue to monitor if matters have changed. Read the the news as it flows (I use AFX, 4Cast and UBS for this purpose), concentrating on limiting a possible loss until such time as you are comfortable with what it could bring ie: stop to break even. There we have it - a fighting chance - a jolly good one at that."

Popularity: 2%

Grading your Trades

Record keeping for my trades are lacking at http://www.forexproject.com/My_Trade_History/.  I keep track of my profit/loss and sometimes add commentary for each trade but most of the time I just don’t have the time to post commentary on the site.  Therefore I am going to try something new.  I am going to attempt to grade my trades on a point system.  This grading system is based on a system that John Carter has mentioned in his book and articles.  It should be noted that even the most experienced traders still keep a log of their trades with important commentary for each.

This grading system actually has two parts.  The first is an execution grade, the second a performance grade.  Execution scoring is exactly as it sounds, how well you executed a trade.  A grade of 1-5 will be given and is similar to scoring in school where a 5 is the best (grade of A) and a 1 is the worst (F).

1     Impulse Trade
2     Entered setup late and didn’t set a target
3     Followed trade entry but removed stop and let position run past original target
4     Followed trade entry but closed out position before predetermined target hit
5     Followed trade as planned 

The second part is a performance grade which has the same scoring system as the execution grade.

1    Stop hit
2    Out at a different price from stop but a losing trade
3    Out at even
4    Out at a different price from target but profitable
5    Target hit 

This seems like a lot but will allow you to give yourself an average grade each week and assess your execution and performance of trades.  In addition, it will allow me to easily place 1 number for execution and 1 number for performance per trade when trades are updated on the website.

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Taking Losses in Week 8

Week 8 did no start as I had planned.  The majors pushed the USD through support and resistance levels from the onset of trading Sunday evening.  I started trading 2 lots this week also so my losses are magnified.  As this week enters its second day of trading, I’m down 214 pips and $1782.00.  I don’t consider these failed trades though.  I had a plan, stuck to it, and just happened to be on the wrong side.  One great improvement from previous weeks is that I did not let emotion get in the way.  I didn’t trade just for the sake of trading to try to recoup my losses. 

I am still optimistic about the prospects of still having a profitable week and also feel like the lessons I’m learning from the losses are as valuable as any. 

Someone said to me once that you shouldn’t consider a losing trade a "loser" if you had an entry setup, a stop and a limit.  I quote a fellow visitor, Blackday now:

You haven’t actually made a mistake at all. What you have done is made a successful trade!

Your trade consisted of an entry, a profit objective and a stop. Of the two price levels you were watching, the stop was hit. This prevents any further losses and in this respect, the trade can be considered a success.

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Words to live by when trading currencies

"Make 10 pips on a million trades — not a million pips on 10 trades."

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Learn with Trade the Markets Video

Trade the Markets videos for this evening.  Check them out:

Hubert’s Video Link:

http://clicks.aweber.com/z/ct/?L723RVhJ3kQQuGd.2rHcxQ

John’s Video Link:

http://clicks.aweber.com/z/ct/?LqG1G29KzGDggBEXgEudMw

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Forex Blog Week 8

Entering week 8, I have learned much.  The most knowledge has come from my everyday trading experiences.  There is just no substitute for this.  There is also no substitute to trading a real account with real money.  Demo accounts are o.k. to test your setup ideas, but other than that, there is no possible way that a demo account can prepare you for the real thing.  The main reason is because when you trade a demo account, there is no emotion.  Emotion is what moves this market and if you aren’t experiencing this emotion, your not learning.  To start your education, get a mini-account, trade single lots, and less volatile currency pairs.

Going into this week, I’m focusing on what has made prior weeks successful.  I’m focusing on support/resistance setups with the thought that the forex market will continue with its range trading environment.   In the meantime, I will continue to experiment with my relative strength calculations to prove their usefulness.  Last night, I completed a TRIX version of my relative strength charts.  TRIX is a triple exponential moving average of my Relative Strength values.  This provides a smoothing factor and perhaps more of a leading indicator.

You can view my 8 EMA Relative Strength Currency chart at: http://www.forexproject.com/staticfiles/ema_rs.php

The 8 EMA TRIX Relative Strength Currency chart is at http://www.forexproject.com/staticfiles/trix.php

The pairs I’m looking at possible setups for Sunday/Monday:

CHF/JPY (180-min)
USD/CHF (180-min)
EUR/USD (180-min)
GBP/USD (60-min)
EUR/CHF (180-min)
GBP/JPY (240-min)
NZD/USD (Daily)

I also forgot to mention that this week I am moving my default lot size from 1 to 2.  This will double my gains but also double my losses. 

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Relative Strength Formula using EMA

I’ve changed my relative strength calculations to use EMA, specifically the 5-day EMA.  This information will be updated automatically as I am automating the data retrieval and data crunching this weekend.  There are more changes to come but I find that this graph is useful for determining a base currency strength or weakness against others in the basket.  Think of it as being an index for each countries currency…

http://www.forexproject.com/staticfiles/ema_rs.php 

As always, feedback is appreciated.  It is beneficial to everyone that the graph is tweaked in any way possible that would make it more useful.

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