Items Tagged With march 2007

I enjoyed reading this blog post that talks about the four guiding principles of market behavior which have their roots in the early pioneers of technical analysis.  

Principle 1 : A trend is more likely to continue its direction than reverse.  Everyone by now has heard the phrase, "the trend is your friend."  Fading a trend may also  be a losing proposition.

Principle 2 : Trends end in climax.  When they do end, the trend rarely changes overnight but consolidates instead.

Principle 3 : Momentum precedes price.   Look for divergences in indicators.  Expect a new price high following a new momentum high.

Principle 4 : Price alternates between range expansion and range contraction.   Price consolidates or contracts much more than it expands.

The goal is to determine which principle your current trade is based on.  If it isn't part of any of these principles, it may be time to rethink it.

The post is definitely worth the read at http://blog.afraidtotrade.com/?p=27

I received an email from Rob Booker today and he is having his publishers send me a free copy of his book, Adventures of a Currency Trader: A Fable about Trading, Courage, and Doing the Right Thing.  As always, I'll give immediate feedback once I've started reading it.  Here's a quick summary of his book:

This book explains in a simple, down-to-earth manner how any individual can implement a conservative, consistent trading system in the foreign currency market and, in so doing, become a financially independent currency trader.  Written in an informal, engaging style, the author Robert Booker traces his own path from job frustration to profitable currency trader.  He provides readers with simple strategies for making money every day in the currency market without risking a large amount of capital.  He emphasizes the importance of implementing the trading system in a methodical and disciplined fashion and of avoiding emotional responses to the market.  Throughout the book are profiles of traders trained by the author and who exemplify key aspects of trading success.  The book is both technical and motivational.  It provides techniques for consistently making money in the currency market and it provides stories of ordinary people who are using those very same techniques to trade successfully.

The Street has an article on the reasons why me and perhaps you are not millionaires.  Some of the reasons can directly be applied to why me and perhaps you are not making any money trading forex.  

1. You care what your neighbors think - Neighbors in this case could be other forex traders.  I do care what all of you think because it helps me in my quest to become a successful forex trader.  But ultimately it's your money that you're trading and if you have a successful strategy that works for you, I think you should run with it no matter what others say.
2. You aren't patient - This is a very key trait in successful traders.  I need work on this one but I'm coming along.
3. You have bad habits - These bad habits have to be isolated and purged if possible.
   
4. You have no goals - "It's difficult to build wealth if you haven't taken the time to know what you want." Enough said.
   
5. You haven't prepared - Preparation in trading is very important.  Prepare for the worst or you'll wind up risking a good portion of your capital.
6. You try to make a quick buck - I wish a quick buck was easily obtainable trading forex.  Don't believe the hype, it's not.
7. You rely on others to take care of your money - The whole point of trading forex is for me to obtain financial freedom.  Relying on forex signal services or others doesn't accomplish this goal.  Who says they're going to do anything but lose you money.
8. You invest in things you don't understand - I hope I understand a bit about trading forex but I have a lot more to learn.  Don't throw all of your savings into the market until you know that you have a more realistic chance of success.
9. You're financially afraid - If you're afraid to take risks, trading forex isn't for you.  Risk takers are sometimes the most financially successful people.  As long as your risk is known and planned, you'll be better off.
10. You ignore your finances - Keep track of your finances which means keeping strict records of your trades.  Don't be afraid to analyze a losing trade.  You have to be able to learn from losing trades or mistakes. 
    

If you want to read the article, go to http://www.thestreet.com/_tscrss/newsanalysis/opinion/10345796.html

I was reading an article last week and the author's method of determining his stop loss levels was new to me.  I had never before heard or read anyone else who does it this way and that is why I'm posting this information.  I'm not saying I'm going to adopt this method in my trading but it is certainly refreshing to get a different perspective.

The author, Derek Frey, uses the fibonacci sequence, specifically 8, 13, 21, 34, 55, and 89 as stop levels.  For example, let's say you are shorting the USD/JPY and you use normally use the previous high as your stop level plus five pips, in this case, 121.66.  What the author does instead is to find the next closest Fibonacci number, which is 89, and would set his stop loss at 121.89.  This is all open to trader discretion and depending on market conditions such as volatility, one could also use the second closest Fibonacci level in this case, which is 8, setting their stop at 122.08.

The entire article titled, "Using Stop Loss Orders to Determine When to Enter a Trader" is worth the read and can be found in the March 2007 issue of PitNews eMagazine.  Unfortunately I can't post the pdf here because that got me in trouble with Currency Trader Magazine a while back.  You can obtain the entire issue for free by going to http://www.pitnews.com.

I was reading DailyFX's weekly trading lesson today and doing so pushed me to exploring something entirely off the subject.  But first, let me talk a bit about the lesson content.  The lesson was on head and shoulders chart patterns.  I certainly have read enough about chart patterns, head and shoulders being one of them, but I've actually never traded this chart pattern.  The lesson is short and basic and if you don't know much about the pattern, you can read the lesson at http://www.dailyfx.com/story/strategy_pieces/weekly_trading_lesson/Weekly_Trading_Lesson__Head___1173715146697.html.

The example the author gave pertained to the EUR/USD on a 1-hour chart.  The head and shoulders pattern is actually still in play as I write this.  In looking at the picture of his chart, I could clearly see the two shoulders and head.  I then went to my Metatrader charts and opened the 1-hour EUR/USD but I could not see the pattern.  Here's what I saw when I opened my charts:

I don't see the head and shoulders, do you?  Call me stupid but I never thought about getting a different perspective by changing the zoom level on my charts.  I usually only zoom out at the most one level on my Metatrader charts.  But yet again, I never really thought about zooming out further.  Yes, I feel like quite the amateur but here is what the same chart looks like zoomed out two more levels:

Do you see it now? It isn't perfect but it's pretty evident.  

When I first started trading forex almost 2 years ago, I would hold trades for longer than a day.   This was mostly due to the fact that I didn't know what I was doing and I was either looking for unrealistic profit targets based on my time frame or it was because I would keep moving my stop loss hoping for the price to bounce back my way.  

I've never held a trade more than a couple of days and in the past year, I've rarely held a trade for longer than 24 hours.  Therefore I would have to classify myself as a day trader.  I feel most comfortable technically day trading but does day trading suit me? Based on my hectic schedule and already my challenge for sleep, I don't think it would be smart for me to attempt any day trading strategies at this point in my life.  My h-system is a day trading strategy but it's systematic so I'll continue trading it but if the performance continues to suffer and the only option is for manual intervention, I might have to put this off also.  

So what I'm doing now is trying to look more at trades that last a couple of days.  I'm not sure what style of trading this can be classified as but from what I mention below, it could be swing trading.   I'll continue to look at 1-hour charts but I'll also start concentrating my efforts on the 4-hour and daily charts.  Position trading is the style that ultimately may suit me best.    

I was reading the Special Trader's Issue of Stocks & Commodities that I received this month and they have an article that looks at the different trading styles.  According to the author of this article, there are actually 7 types:

1. Intraday trading - This style of of trading is very short-term, mostly holding for only minutes.  This style requires extensive knowledge of the market and also extensive capital, both of which I'm short on.   Traders of this style may want to use 15-minute to 1-hour support levels.  This style is impossible for me at this point.
2. Day Trading - Trades may be held a bit longer than intraday but not much.  Traders of this style may want to use end-of-day intraday support levels.
3. Momentum Trading - This style of trading tries to take advantage of a sudden rise or drop in the price of a currency pair.  Trading this style is very similar to day trading in that traders would mostly want to use end-of-day intraday support levels and also have a moderate sized capital base.
4. Swing Trading - Traders of this style typically hold positions for several days to a few weeks.  Swing traders use weak support levels that form over several days.
5. Position Trading - This style requires a smaller capital base and less experience in the market.  Position traders can use weekly charts to start their analysis and moderate support levels that form over weeks to 3-months.
6. Intermediate-term trading - These traders look longer-term and at quarterly support levels.
7. Long-term investing - This style of trading requires holding trades for a years at a time.  I don't see myself trading Forex long-term.  If I'm investing long-term, I'll look at mutual funds and dollar cost averaging.  

It seems like the subject of how best to quantify a winning or losing trade is a hot topic.  There were a couple of differing opinions.

Two people agreed on the following example
If you buy 2 lots at the same time and you sold the first lot for a 10 pip profit and the second lot for a 5 pip profit, you could report a profit of 7.5 pips.  Pip Heaven believes this way works because we are interested in trading performance, not the exact amount of money you made.

Chad thinks that the best way to standardize performance regardless of account type is to report a profit to loss ratio.  His example explains why.   If a trader with a mini-account (10K) profits 30 pips on 10 lots, he can say he is +300 pips.  If a trader trading with the same risk but 1 standard lot (100K) profits 30 pips, he can only say he is +30 pips.  Both the mini-trader and the standard account trader profited the same amount of money, $300. 

Chad's example makes a lot of sense and clearly points to the faults in my pip calculation.  Though this is the case, I had standardized this way of calculating my performance therefore on a month to month basis, it still worked in telling me whether I did better or worse than other months.  So regardless of whether your method is believed to be right or wrong, if you are consistent in how you calculate performance, the results from any method should still tell you what you want to know.

Overall, most people agreed that using percentages are the best solution including Simon, Ed Mamula, Hermann, and molbio1.

Brian Dolan, Director of Reseach at Gain Capital (FOREX.COM) wrote an article in the March 2007 issue of SFO Magazine titled, "Trading Mistakes.  Avoid Online Forex Pitfalls."  

This is from the vantage point of a long-time employee of a forex brokerage so I've decided to post this information.  I've heard most of the pitfalls before but not from the broker perspective.

1. Overtrading - Why would a forex brokerage discourage overtrading?  According to Brian, Gain Capital look at a trader from a long-term perspective and if traders fail, they lose the potential volume that a successful trader could have generated.  He breaks down overtrading into two forms:
1. Trading too frequently
2. Trading too many positions at once
2. Overleveraging/Under-funding - Overleveraging means that you have entered into a position that is just too large relative to your available margin balance.  Under-funding is not having enough margin to support your position size.  Once again, the discouragement from Forex brokers to be overleveraged or under-funded is from a long-term profit standpoint on their end.  There is no question that these pitfalls will be major reasons for a trader failing.
3. Trading Without Stop Loss Order/Moving Stop Loss Orders - We've all heard this before.  Some of you have mentioned that you use a visual stop loss and others like myself set hard stops.  I've found in the past that a visual stop doesn't equate to that most of the time in my trading.  I was tempted when I first started to trade to just ride it out, a recipe for disaster.
4. Trading Around Data Releases - Moves during data releases can be violent and unpredictable.  Some brokers raise the spread (Oanda) and other broker re-quote (FXCM.)  I've stayed away from trading the news.  I've tried it but unfortunately didn't have a lot of success because of my inability to focus due to having a full-time job. 

I was reading the Afraid To Trade blog which concentrates mostly on trading stocks and he mentions 5 ways in which you can increase your possibilities for profit.  Here they are modified a bit to fit currency trading:

1. Hold your trades longer than usual
2. Increase your position size by concentrating your capital on fewer currency pairs
3. Decrease your position size but trade higher volatile currency pairs
4. Decrease your normal position size but trade more opportunities in more currency pairs
5. Increase your market knowledge and education

In my opinion, these are decent suggestions as long as you don't compromise your trading plan or style.  These can not be forced on yourself either.  For instance, if you don't feel comfortable or if you're not familiar with trading the GBP/JPY (a highly volatile currency pair), you shouldn't just dive in without performing your due diligence.

You can find view the Afraid To Trade post here.