Items Tagged With november 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. 

I just read the first 6 pages of Brett Steenbarger's new book titled, "Enhancing Trader Performance: Proven Strategies from the Cutting Edge of Trader Psychology."   The book was just released  on November 3rd. 

Brett easily hooked me in the first 6 pages with a profile in psychology of two real traders.  The first trader, Al never lost his cool and didn't violate his stop losses.  The second trader, Mick was kind of a hot head who violated his stops and took a loss personally. Mick after having a bad morning where he allowed his emotion to affect his trading decided to skip lunch to review his trading, figure out the market and also how to get back his money.  Al took his lunch and went back to trading with his cool and calm style after lunch.  Which one is the successful trader you ask?  Mick is the multi-million-dollar performer.  Al is no longer trading.  How has Mick been able to succeed despite his obvious violation of psychological principles?  Deliberate practice.  Mick is dedicated to the market and analyzes his every mistake.  This helped in preparing him for similarly frustrating trading scenarios and provided him with the confidence to get through it.

I have not bought the book yet but I might.  

http://astore.amazon.com/theforexproje-20/detail/0470038667/002-4343923-4611237

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.  

What are the best ways to become a successful forex trader? These results are taken from a Moneytec poll that had over 6,000 respondents and are ordered by most votes first.  My comments follow each result.

1.  Study by yourself and get experience - Over 45% of the respondents said this was the best  way.  I have to totally agree with this and is what I've been doing for the last year.   One point I'd like to make is that you don't have to do it all by yourself.  If you can find a trading partner who has the same drive and motivation as yourself, this could be even more beneficial.  
2. Develop your own system - Over 25% voted for this but I think this goes hand in hand with #1.  If you are studying by yourself and want to get more experience, developing your own system is an absolute must even if you never use it.
3. Learn from a mentor - 15% said this.  I think I've stated my views on mentors clearly in previous posts.  Mentors are what you make of them.
4. Open a managed account and monitor it for education - 5% voted for this.  I personally have never tried this method.  I did just hear last week that you can open a managed account with Raghee Horner called Autotrade FX.  You open your own account at TradeDirectFX and it mirrors her every buy and sell order.  Interesting concept but I think difficult to learn from.  You see all the buy and sell orders but no rationale behind them.
5. Hire a portfolio manager - This was voted as the best way by 2.65% of respondents.  I don't get it.  I'd rather be self-sufficient and how do you know who to trust.
6. There is no way to become continually profitable in forex - 1.51% negative respondents to this one.  The jury is still out on this for me personally.  I hope I don't come to this conclusion.
7. Get signal alerts by subscription or live from a guru - 1.09% voted for this.  I don't know if this helps or not.  I don't like it though.  Who do you trust with the never-ending list of scammers out there.  If you want to listen to someone else though, there are plenty of sites where you can get free trade calls and technical analysis.  In fact, there are just too many out there to choose from.
   
8. Get Analytical reports and Make your Judgement - Less than 1% chose this response.  Sound very similar to #7.  The analytical reports are basically going to tell you which way to trade so making judgment calls here is probably kept to a minimum.  Not for me.
9. Buy Software or Strategy Description - Less than 1% chose this response probably because this too is very similar to #2, developing your own system.  If you are going to trade forex with TA, you need software and you need a strategy.

Link to Poll at Moneytec

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
    

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.

I'm going to take the opportunity to call this week, Money Management Week.  A lot of what I'll be posting will hopefully be related to this topic which probably means that website traffic will decrease.  This would not be unusual considering that "on average, traders spend at least 10 times more time and effort on seeking the magic formula for trading than on learning to manage the trade." (Source: Matt Blackman, "Losing to Win")  

I've been very aware of the fact that money management is the most important aspect of trading but hopefully by bringing this subject into the forefront this week will make you and I even more aware.

From a lot of the backtesting and forward testing I've done over the last year, it's become quite evident that winning percentage for most systems are below 40%.  Some hover around the 40% level and others are even lower, reaching the 20%-30% level and below.  According to Perry Kaufman, author of "A Short Course in Technical Trading" and a veteran trader, trend-following systems are the best trading systems around.  But he also states that you can expect 6 or 7 out of every 10 trend trades to be losses, some small losses and some a little larger.  For this reason, a lot of beginner and novice traders wonder how it's possible to ever be profitable trading.  

The point is that the focus shouldn't be placed on how to achieve an unrealistic expectation for your win to loss ratio but to concentrate on money management.  I'll admit that money management hasn't been my prime focus and it's reflected in the subject of my posts over the last year.  In fact, I've only tagged 1 post with the subject money management attached to it.   

This week I'll be gathering together some useful links to money management articles and I'll also be talking more about money management as it pertains to my trading.  Larry Williams, a veteran trader said, "Since losses are an integral part of this game, a strategy is as essential as the proper attitude.  All jobs have good days and bad days so deal with it..."

Losing to Win

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.