Items Tagged With october 2006

I received a follow-up email from the DCIO or the Division of Clearing and Intermediary Oversight, a legal arm of the Commodity Futures Trading Commission.  My questions were:

1. How can the data (FCM merchant report) best be interpretated to conclude the financial health of a broker?
2. What would be grounds for a broker having to halt operations based on the data from this report?
   

Their response, which was from the Special Counsel was long but the information indispensable.  Click [Read More] to read their entire response.

The 2 important points I got from the response were:

1. The FCM report that shows a firms net adjusted income is not totally indicative of financial health mainly because, in her words,  "a firm's transactions and positions (proprietary or customer), exposed to market events can impact capital levels quickly."  This is very similar to our (we traders) capital levels in a high risk market such as foreign exchange.  Market events can impact our balance quickly. 
   
2. Similar to the Refco situation, in her words, "should an FCM with liabilities to customers for off-exchange retail foreign currency have to halt its operations due to a loss of capital, those customers may be left in the position of unsecured creditors of the entity with respect to trying to collect anything from the FCM." 
   

I've put together a basic backtesting script that doesn't take any fancy exits or stop loss adjustments into account but nevertheless, the results are interesting.

From January 2005 until yesterday, if I entered a 1 lot position here are the results for different limits and stop losses:

30 pip stop and 30 pip limit: 2820 pip profit

25 pip stop and 30 pip limit: 2705 pip profit

20 pip stop and 30 pip limit: 2210 pip profit 

30 pip stop and 25 pip limit: 2580 pip profit

30 pip stop and 20 pip limit: 2290 pip profit

30 pip stop and 35 pip limit: 2395 pip profit

30 pip stop and 40 pip limit: 2580 pip profit 

30 pip stop and 45 pip limit: 2130 pip profit

30 pip stop and 60 pip limit: 1860 pip profit

So the most profitable is the 30 pip stop and 30 pip limit but this is a 1:1 risk/reward.  The least profitable is when setting the stop and limit to have a 1:2 risk/reward.  The 1:2 backtest is still profitable so which one is the smartest to use? I'm not sure.  Should you choose a trading system with a superior risk/reward over one without even though it has tested as less profitable?  Once again, I don't know.  I'll have to add some more advanced logic to the script to emulate my H-system rules. 

I just got the word that John Carter is having a free webinar today titled, "Trading Ambushes - A Plan for Identifying & Trading Pullbacks."  I like these guys, John Carter and his trading partner Hubert.  They seem like they're real hardcore traders, not marketing machines.  If you are available, take advantage of it at 4:30 pm EST today.

http://clicks.aweber.com/z/ct/?COkYa12jComENXDCXcM51w

Rob Booker is having a live question and answer session tomorrow at 15:00 GMT titled, "Top Five Tricks of Trend Trading" on FXStreet.  You can sign up at the following link:

http://www.fxstreet.com/live/showroom/session.aspx?id=edba3d90-cafa-4dec-9d38-81c7a46d1a18  

The Forex Project can now be translated to the following languages:

French, German, Italian, Spanish, Portuguese, Japanese, Korean, Chinese and Arabic.

I cannot read any of these languages with the minor exception of Spanish where I know words like Hola and Como Esta so there really is no way for me to know how well this site is being translated.  In one of my posts, the spanish translation for Rob Booker is Robo Booker.   For any multilingual visitors, please let me know if the translation is readable.   

To translate, click one of the nine flags on the right menu above the big FXCM advertisement.

I get the following question often from visitors to this site.  "I'm confused about the bid and ask.  Which is used when I go long and which when I exit the position? Which is used when I go short?"  It goes something like this but of course the questions vary in wording.  This is a wet behind the ears, beginner question that a lot of us now should be able to answer so I will try.

The best way to answer the question is with an example.

Assumptions: 

1. You put an order to go long on GBP/USD at 1.9030
2. You want a 30 pip profit
3. You want to risk 30 pips
4. The GBP/USD has a 5 pip spread

When going long, the ASK price is used to initiate the order.  So in our case, when the GBP/USD gets to a price of 1.9025/1.9030, an order is opened to go long.  When the position is opened, you will be down 5 pips.  That is because if you want to turn around at the same instant and close your position, you will have to sell it back using the BID price which is at 1.9025.  You had just bought it at 1.9030.  

So you have a long position opened at 1.9030.  You want to close it once it reaches a profit of 30 pips.  If we reach 1.9060, we will sell it back.  Since we use the bid price when selling, the position will close once the bid/ask is 1.9060/1.9065.

The same goes if your stop loss is hit.  Your stop/loss is set for 1.9000/1.9005 since the bid price of 1.9000 is used when selling and is exactly 30 pips from our entry of 1.9030. 

Here an opposite example.

Assumptions: 

1. You put an order to go short on GBP/USD at 1.9030
2. You want a 30 pip profit
3. You want to risk 30 pips
4. The GBP/USD has a 5 pip spread

When going short, the BID price is used to initiate the order.  So in our case, when the GBP/USD gets to a price of 1.9030/1.9035, an order is opened to go short.  When the position is opened, you will be down 5 pips.  That is because if you want to turn around at the same instant and close your position, you will have to buy it back using the ASK price which is at 1.9035.  You just sold it at 1.9030.  

So you have a short position opened at 1.9030.  You want to close it once it reaches a profit of 30 pips.  If we reach 1.9000, we will buy it back.  Since we use the ask price when buying, the position will close once the bid/ask is 1.8995/1.9000.

The same goes if your stop loss is hit.  Your stop/loss is set for 1.9055/1.9060 since the ask price of 1.9060 is used when buying and is exactly 30 pips from our entry of 1.9030.

This certainly isn't as easy as it seems to explain or simplify.  If anyone has a better way of explaining, post it as a comment and I'll put it on the front page. 

Kathy Lien and Boris Schlossberg, currency analysts at DailyFX have a new website that provides free trade ideas, economic analysis, and more.  I've read both of their books and find them both very knowledgeable in the Forex market.  There are people out there on the web that charge for this type of information whether it's good or not. 

I've signed up for their free newsletter and received the following welcome email which may provide more information on what this site is about:

Welcome to BKTraderFX! We are delighted to have you join our community of active FX traders. As leading analysts within the foreign exchange market, we are always looking for new ways to reach out to our audience. The benefit of working in a trading team has allowed us to filter out the best trade ideas. In this blog, each week we will be reviewing the current conditions in the currency market on both a fundamental and technical basis in a more free speaking format. We will bring the strategies in our 3 books to life and will also be posting any ideas that we may have, articles that we find interesting and our takes on key economic and geopolitical news. Look forward to many informative emails from us.

You can visit their site at http://bktraderfx.com

or just go directly to their blogspot blog at http://bktrader.blogspot.com

The H-system has performed well since I started trading it again; it looks like October may be one of my most profitable months trading.  On Friday, I was up 287 pips.  Yesterday, I captured 90 pips and today I'm up 40 pips on my closed lots with a guaranteed profit of 30 pips on my only open lot.  That brings the total to 447 pips for October.  

I've been working on a couple more systems to add into the mix.  The goal for me right now is to trade multiple systems and to incorporate additional currency pairs instead of just the GBP/USD.  One system that I just finished backtesting on 5 years of data uses the USD/JPY only and trades during the Asian and European sessions.  It certainly loses more than it wins but the average reward/risk on each trade is 2:1. 

As this journey continues going forward, certain things that I was told when I first started trading become realized more and more each day.   All of these things are based on what I personally have noticed over the past year and don't necessarily mean they are true to you.  Remember that I've only been trading currencies for a year.  I may look back at this post a year from now and roll my eyes wondering how I could have ever thought this.  

1. I have to keep discretionary trading to a minimum.  This doesn't mean that I won't use any bit of discretion when trading but my personality is more suited to trading systematically with a touch of discretion.  The systematic part is present in each and every trade but the discretion may or may not be needed in a particular trade.  
2. You don't have to win more than you lose.  This means making money management the most important part of your system.  In fact, I shouldn't make winning or losing my #1 goal.  The #1 goal should be to preserve my capital. 
   
3. Searching for the holy grail is not fruitless.   This may sound contradictory but there is nothing wrong with trying to find the holy grail as long as you remain realistic.  Trying to find that perfect system helps one come to that realization that there may not be one.  Searching also provides one with experience and motivation to find the best of the best.   The holy grail to me doesn't have to be a system that wins 100% of the time.  It can be a system that suits me best and produces an outcome that is favorable to my trading experience. 
   
4. I don't need a mentor because I have you and you have me.  I'm not saying that I can provide you with advice on how to do this for a living nor am I saying that a mentor won't help you.  I'm saying that you have every other trader at your disposal either through forums or emails that you can tap to get you back on track.  Everyone that has every sent me an email or comment has helped immensely no matter what the question was.  It's actually unbelievable how helpful and honest most people can be.  It helps restore my faith in humanity.  I've also tried to answer every question that was ever posed of me because it's just another nugget that you or I can use to come to our own conclusions.  Rob Booker or any other mentor won't tell you how to be profitable.  Booker will give you advice based on his understanding but it won't work for you until you can put it all together on your own.  For instance, he tries to get his students to trade breakouts of the European session high or low during the US session.  I don't think he expects you to continue trading this forever or continue to follow everything he has to say for the rest of your life.  All he is doing is giving you the discipline to follow a system, tweak a system, and make decisions on your own. 

I have a lot more realizations but I think this is enough for one day.

I decided this weekend that backtesting with 1-minute data just wasn't accurate enough for backtesting daytrading strategies so I went out to Gain Capital's site, http://ratedata.gaincapital.com and grabbed 5 years worth of tic data for the GBP/USD.  It took hours upon hours of grabbing the CSV data, inserting into the database and then modifying my backtesting scripts but tic data is going to give me the most accurate results possible. 

Unfortunately the results obtained were disappointing and the H-system failed to show anything but a tiny profit over the last 5 years.  This pretty much throws a huge wrench into the only strategy I've been using over the last month or so.  I don't know how others feel about this but should I be making a decision to shut this system down?  It has been profitable since I started trading it but based on the backtesting results, this would be nothing but a waste of time to trade.  I know that past results don't always translate into future results but the whole point of backtesting is to find a system that has past results that are favorable.  This would mean going back to the drawing board.  If anything, the results instill less confidence and trust in me and this alone can create problems when trading.  The most disconcerting thing about all of this is the confusion that it causes and the feeling that I have to start over again.  I guess this is all part of trading which isn't supposed to be easy.  I don't always ask for advice explicitely, but I sure could use some on this one....