No Plan, No Trade
I’ll admit that I’m a bit discouraged by the uncertainty of my trading plan or lack thereof. Whenever I do try to develop one, I just get overloaded with information to the point where I don’t even know where to begin. Therefore, this week I have not been trading much. The only trades that I placed were generated by my Dooku trading system that I have already lost confidence in due to the weak backtesting results it generated on data from 2000-2003.
So where does this leave me? I’ve actually been getting more involved at my full-time job lately. I don’t know if this is an ominous sign that my Project is failing. I know that I’m just a little down on myself right now. I have to realize that I’ve only been doing this for about 9 months now and my journey has really just begun. I’m going through the same learning process that a lot of traders who are now successful traders have gone through. I’m also going through the same learning process that a lot of traders who have since failed have gone through. What keeps me going is that I find trading to be such a rewarding experience and I enjoy it immensely.
I’m not a quitter and I know that I’ll continue to grind it out to see where this takes me. What do I need to do to get back in the right mindset?
1. Continue to develop a simple trading plan, either mechanical or discretionary. I’m leaning more towards a discretionary plan right now.
2. Put more time into analyzing multiple time frames of currency pairs. What may help is for me to pretend I’m a currency strategist and each day write up my own thoughts. At the end of each day, review my prior thoughts to see how well I did.
These are really the only 2 ideas I can brainstorm right now. For all of you that are just starting to explore the world of trading, don’t let my discouraging thoughts seap into your minds. Just realize that you too will go through this and it’s all just part of the process.
Dooku Forex Trading System
I started to work on multiple trading systems over the last week or so and realized that I was falling into the same trap of trying to do too many things at once. I decided this weekend to work on my first trading system more. The first thing I did was give it a cheesy name so that I can distinguish it from all the others. I have named it Dooku. You can figure out on your own where I got this one from.
This system was previously being tested on hourly charts with a risk reward of 1:1. It tested well with a 50 pip stop loss and a 50 pip profit target. The first thing I wanted to do was to get the risk reward to 3:1. I successfully accomplished this and Dooku tests very well on the hourly charts with a stop loss of 75 pips and a profit target of 225 pips.
I will forward test this system this week and going forward to see how it performs. From my backtesting, it has never had a losing month. I will forward test this with real money and 1 lot each trade. I will use a 75 pip stop and a 225 pip profit target. I will trade only the GBP and EUR. From my calculations, this system will generate an average of 20 signals a month for each currency pair.
Steve Shenker’s Trading Corner
It's actually Sam Shenker's Trading Corner and it can be found here:
http://www.forexproject.com/Blog/Investing_and_Trading/Original_Traders_Corner/
What Markets Am I Going to Trade?
This is a continuation of my trading plan. I have added a link to the left main menu called My Trading Plan. You can view the latest trading plan at any time by clicking this link or going to http://www.forexproject.com/trading_plan/
The second question I will ask myself is "What Markets Am I Going to Trade?"
I will be trading the Foreign Exchange market only. Specifically I will be looking to trade the EUR/USD currency pair only until I can develop a consistent trading strategy. Once I become more comfortable trading the EUR/USD, I will slowly integrate more currency pairs into the mix. I will allocate 100% of my fund to trading forex.
This year, I want to look further at trading the following:
· Mini-sized Dow (YM)
· E-mini S&P (ES)
· E-mini Nasdaq (NQ)
· E-mini Russell (ER)
· Soybeans (S)
· Mini-sized gold (YG)
· Corn (C)
· Wheat (W)
· Crude Oil (CL)
· Mini Crude Oil (QM)
Week 14 Performance
As I mentioned a couple of days ago, this week was especially hard on me. I lost $3000 to drop my 14 week earnings to +2500. There are a couple of major adjustments I’m going to make going into week 15.
1. Finish a preliminary test plan that at least details 1 trade setup
2. Stop trading multiple currency pairs. I’ve been trading and trying to study about 8 different currency pairs. I feel like this is definately too much for me to handle and most would not recommend a beginner to do this. I will try to study and trade the EUR/USD ONLY since it is considered to have the most volume. I will slowly try to incorporate some more of the major pairs into my trading plan as I get more comfortable with the EUR/USD.
3. Back test, back test, back test. A couple of months ago I was really interested in back testing trading strategies but lost interest after several attempts proved to be very unprofitable. I have since started using Metastock with esignal to backtest moving averages. Metastock has an optimizer function that will go through all combinations of moving averages and return the most profitable combinations. My goal will be to first to find the most profitable moving averages for the EUR/USD. I will try to correlate the moving average pairs to produce the most profitable 3 moving averages.
I’ve already started performing #3 and I currently have Metastock performing backtesting on over a years worth of 1 hour interval data. It’s very CPU intensive and will take about 4 hours. It’s currently half way done and so far the best EMA pair is the 7/75. The 7/75 EMA’s actually have some impressive results over the last year on the 1 hour EUR/USD chart.
Here is an exact description of the backtest:
Buys/sells when a moving average of 7 periods goes above/below a moving average of 75 periods.
I also have it factoring in the broker fee and have set the results to buy/sell 1 lot.
Here are the results:
70 profitable trades with average profit of $355.86 per trade.
Highest profit was $1020 and the most consecutive profitable trades was 12
15 unprofitable trades with average loss of $972.67 per trade.
Highest loss was $2180 and the most consecutive losing trades was only 2
Over 1 year, if you followed this trading plan by buying or selling 1 lot each trade, you would have profited $10320.00.
Do Interest Rate Differentials affect Currency Price?
I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present. What I found was that there was no correlation between the actual differential and the price of the currency pair. What I did find was the following:
We are in the third cycle of price changes. What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2). Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)
Here are my estimates of cycle length:
Cycle #1 – 01/1999 – 05/2001 BULLISH USD (29 months)
Cycle #2 – 05/2001 – 12/2004 BEARISH USD (43 months)
Cycle #3 – 12/2004 – present BULLISH USD (16 months +)
I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.
Here are the periods of time when the differential hit 0.00%:
5/11/2001
11/10/2004
As you can see, there is a correlation between the differential being 0% and the change of cycle. Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.
If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come. Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.
I don’t know if this study is B.S. or not. There are many other economic factors that can affect currency prices and I didn’t take any of these into consideration such as the US Account Deficit or the Eurozone’s slower GDP growth. In addition, with Iran switching to EURO’s for payment of oil, there are other things in play that make it more difficult to predict the future.
EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32)
March Issue of Currency Trader Magazine
After all of our comments regarding the lack of substance regarding ichimoku chart analysis, the March issue of Currency Trader Magazine fills the gap. There is a 6 page article, "Demystifying Ichimoku analysis." I'm looking forward to reading it. In addition, the new issue contains:
-Dollar Bull: Can the buck stay a step ahead of pundits?
-Japanese Yen: Marching to its own drummer
-Currency Basics: All about the interbank
-Currency System Test of the Trend Strength Indicator
Content Removed: Download from http://www.currencytradermag.com
Paid Seminars
I’m mentioning John Carter again because he is having a two-day online seminar this weekend that concentrates on trading the forex market. I have never really paid for anything but books towards my education but I’m wondering if a paid seminar is beneficial. ??? This is a question to any of you who have paid for seminars. Are they worth it?
Carter’s seminar this weekend is Saturday and Sunday for a total of 14 hours. Here is the agenda:
- Your chance to see what you missed in Las Vegas
- Review Forex Market Basics (Everything you need to know to trade them)
- Trade by Trade Analysis with Real P&L’s for John’s 5K Account
- Major focus: Currency Market
- Get Insight into Key Winning Trade Setups
- Learn everyday Trading Strategies for the Currency Market
- View John’s Favorite Setups
The seminar is $995 and I cannot say that I haven’t been thinking about it. You can read more on his website. John Carter Seminar
I would appreciate any comments that you may have.
Good John Carter Video Today
John Carter’s video shows him looking at state of currency pairs last night. This is a great video to see his style of trading. I didn’t watch Hubert’s.
Hubert’s Video Link:
http://clicks.aweber.com/z/ct/?xuxu5Tj0WJC3cCp1gKG.1A
John’s Video Link:
http://clicks.aweber.com/z/ct/?fSwEJQwvvTxDdcBKWSuyUg
Candlestick Studies for Next Week
I’m attaching a graphic of 8 currency pairs and their corresponding weekly candlestick patterns provided by Metastock software. Going into next week, we see:
EUR/USD: Engulfing Bear
AUD/USD: Doji Star
EUR/JPY: Engulfing Bear
; "Candlestick patterns")
