Adventures of Young Pip

Step 5, Part 2

2010-02-18T13:35:00.002-05:00

I haven't done much work on this, probably because I forgot what I said I was going to do. But I just read the last post, so I need to figure out what the big moves have in common. First it would help to figure out what qualifies as a "big" move. Its going to be an arbitrary cutoff, so I'm going with the top 50% on a 20 day move. I don't know how many that will be, but I hope for a fairly large sample.

I'll probably need to do some historical research to see what brought these moves about, as well as some graphs to visualize the move, maybe see if it was some kind of technical setup.

Step 5, Part 1

2010-02-08T13:40:00.003-05:00

I used my idea of examining 1, 5, 10, and 20 days moves and found that there is a relatively weak correlation between the magnitude of 5 day and 20 day moves, as well as 10 and 20 day moves. This relationship seems to exist for all 3 pairs I examined, which are AUD/USD, EUR/USD and GBP/USD. That being said the correlation is still relatively weak, probably 0.38 to 0.43, but that's considerably higher than the correlation the 1 day moves had with the other ranges, which was less than 0.20.

I'm wondering if my methodology is correct, as I took the absolute value of the moves and ran the correlation between the percentile of the various time ranges. So in the case of the 5 and 20 day ranges, the higher the percentile move of the 5 day, the higher the percentile on the 20 day. So if there is a big move on the 5 day, there is a good chance of a big move on the 20 day as well, or if there is a small move on the 5 day, there is a good chance of a small move on the 20 day as well.

Does this knowledge have any particular value? Seems sort of common sensical, no? The better question is: can this knowledge be used to create a system? Of course I would need to examine some other information, but this could lead to something I could build a system on.

That's all I have at present. I don't think I'm ready to leave step 5 yet since I'm not sure what those big moves have in common. I'll need to do some more research on that.

Step 5?

2010-02-01T21:31:00.002-05:00

Well, the truth is that I have not done any work on my system. I think it is partly because I have become occupied with other things and partly because I haven't felt like doing the work. *Sigh*

For some reason the motivation just isn't there right now.

Is this the end?

Step 5... Not Quite There Yet

2010-01-19T13:34:00.002-05:00

Step 5 for developing a system is "Determine the best historical moves in that time frame and notice what those moves have in common." Tharp suggests having at least 50 to 100 sample market moves to examine, including both up and down moves. This is a very simple, but time consuming step. I have almost 10 years worth of daily data for the EUR/USD, AUD/USD, and GBP/USD pairs, so I'm certain I have the necessary volume. What I don't have is the time, or more honestly, the patience to inspect the charts to spot the big moves.

While I think the best way to do this step is to visually inspect the charts, I'm going to create a calculation of moves based on 1, 5, 10, and 20 day price changes. My hope is that this will help me find the big moves and some of the action before and after it.

Until next time....

Step 5 is coming... eventually

2010-01-14T13:54:00.002-05:00

I've gathered quite a bit of daily info on the GBP/USD pair, and I'm currently trying to work my way through it. I realize that for system testing I'm going to need MT4 to build some expert advisers. Looking at data and even charts on Excel is excruciating!

That's it for now, next time I'll have more info.

Determine Your Time Frame for Trading - Step 4

2010-01-08T13:58:00.002-05:00

I've covered this before, perhaps more than once, but I'm probably leading toward a longer-term system. In fact, I'll most likely be trading off of daily data. Given the cost my chosen broker has on automated trading and the fact that I will not be able to sit and watch a trading terminal to enter or exit positions, a long-term system that is relatively low maintenance is best for me.

I like the fact that long-term trading is more hands-off, as well as its potential simplicity and the fact that, according to Tharp, it is least stressful time frame.

The negatives of long-term trading are substantial. The ones that concern me the most are the whipsaws that happen, the low reliability, and the infrequency of trades. It will be psychologically difficult to take a relatively low number of trades and endure the frequent small losses en route to the big gainers. I like to be "right" and only being "right" less than 50% of the time would be a challenge for me. Of course that is where the confidence in my self-tested system will *hopefully* permit me to continue taking trades.

Tharp suggests that, to compensate for the infrequent trading, multiple markets should be traded. In my last post, I touched on the correlation of currency pairs and how that may negate the advantages of trading multiple markets. Its great to be able to have more opportunities in different pairs, but if they're all in the same wrong direction, I've only succeeded in losing money twice as fast. So in order for multiple pairs to work, I'll need to find some pairs with a low correlation to GBP/USD. That will probably lead to the crosses, which may be a bit sophisticated for me, at least at the advent. I'll most likely wait a predetermined amount of time, or trades before I venture into other pairs.

While I know I'm going to be going long term, eventually I'd like to also implement a short-term system. The first 2 advantages Tharp lists are what I like about the idea of short-term trading: lots of opportunities to trade and the stimulation induced thereby. The latter benefit is countered by Tharp, "excitement usually has nothing to do with making money -- it's a psychological need." While I want to believe I can stick to a long-term, patient, and uneventful approach, it will be difficult when looking at intraday charts and seeing all the volatility and potential trades I'm missing out on. However, this is where I hope the confidence in my system will allow me to stay the course.

I think I've reached the point now where I need to start plumbing some data. The next step requires looking at historical data, which should be easy enough to find on a daily basis.

Next time I'll go through Step 5.

Determine Your Objectives - Step 3

2010-01-07T13:33:00.002-05:00

I believe I went through this already when I read through Chapter 3 of Trade Your Way... and conducted an interview with myself. Nonetheless its not a bad idea to revisit and maybe expand on my objectives for trading Forex.

I think I have a handle on the more concrete objectives. I want to earn 10% over the course of a year on my capital. I intend to accomplish that with what will most likely be a trend-trading system, designed to be traded on daily data. With automation its hoped that I could go to a smaller time-scale and trade more often, but that would require signing up with a new broker, which is something I'm not yet ready to do. Also I believe its in my advantage at present to work on a system and understand the logic and performance characteristics behind it before I commit the effort into automation.

I intend to trade only the GBP/USD pair to start, while still tweaking and learning the ins and outs of trend-trading. Eventually I'd like to trade multiple pairs, but my concern with that ambition is correlation. It won't do me a great deal of good to trade in a highly correlated pair, like I'm guessing the EUR/USD is. However even a highly correlated pair could give me another opportunity to have a great trade, and in trend-trading, missing one trade could be the difference between a profit and a loss in the long term.

I don't want to risk more than 1% of my capital on a trade. I need to be able to stay in the game for the big trade that could make the year. Not having really looked at any numbers, I think I'll size each trade so that 1% of my capital is based on the ATR. I think one of the Donchian systems mentioned in Way of the Turtle used a 2*ATR stop, so I may do something like that.

On a more personal level, my objectives are to grow through handling the adversity and the success of trading Forex. I think it will be a great experience to understand more about myself. On an educational level I think I will learn more the Forex market, like economics and statistics among other things. I definitely aim to engage in continuously learning throughout this process.

Although I think I've already covered it in this post, I'll write about determining a time frame for trading.

Develop and Open Mind and Gather Market Information - Step 2

2010-01-06T14:09:00.002-05:00

Step 2 of system development according to Tharp in Trade Your Way... involves the mindset that one brings into trading. He stresses the importance of having an open mind and being aware that your beliefs shape the way you perceive the markets, and you are trading according to those beliefs. I don't think these are necessarily mind-blowing ideas, but its very easy to confuse our beliefs or ideas with incontrovertible truths. These beliefs become so ingrained that they become our reality, even though the true nature of things could be completely different.

The first thing I think of when I read those lines are related to what mental health practitioners refer to as "self-talk". Once we begin to have thoughts, ideas, and beliefs about ourselves, they become a "truth" of how we perceive ourselves, and they influence the way we conduct our lives. It essence, those beliefs become a self-fulfilling prophecy.

I tend to be very hard on myself at times and so I know the propensity for negative self-talk for me is high. I know Tharp's ideas are geared towards beliefs about the market, but I don't think you can examine your approach to the market until you have probed your own beliefs about yourself. For me, it is important to remind myself that I have not failed or am not a failure because some of the ambitions I've had for my life have not come to pass. I also have to remind myself that just because the past didn't work out as I had hoped, it does not mean the future is permanently inaccessible and pointless to hope for.

I'm not sure how that would impact my trading, other than to think I'll need to remind myself that the most important trade is the one I'm about to make, not the (potentially) several losses that preceded it. In the course of developing a system my goal is to find a system in which I can place confidence so I can believe that its positive long-term expectancy will overcome the sure-to-come losing streaks.

I think my beliefs about the market support a positive outlook that will enable me to be successful with trading. I don't believe the market rewards or punishes, nor will it act with any specific malice toward me. Its simply a manifestation of expectations and a record of opinion, essentially. My job isn't to be right or wrong about the markets, but rather to follow it, to just flow with it.

Tharp recommends several books, including Market Wizards, which I think I may already have. I'm going to look for some of the others to aid me in gathering market information. I actually think I've done a great deal of that already, but it doesn't hurt to do more of it.

Next time, I'll work on determining objectives.

Developing a System - Step 1

2010-01-04T13:36:00.005-05:00

Chapter 4 of Trade Your Way... is about the steps necessary to develop a system. Tharp lists 12 steps in the process which are

Take an inventory

Develop an open mind and gather market information

Determine your objectives

Determine your time frame for trading

Determine the best historical moves in that time frame and notice what those moves have in common

What's the concept behind those moves and how can you objectively measure your concept?

Add your stops and transaction costs

Add your profit-taking exits and determine your expectancy

Look for huge reward trades

Optimize with position sizing

Determine how much you can improve your system

Worst-case scenario: mental planning

I find it odd that Tharp gives a list of steps to take before he fully explains some of the concepts involved in these steps, like position sizing and expectancy. What I'll most likely do is try to follow these step-by-step and jump to the pertinent chapters as needed.

First off, "take an inventory".

I went through a lot of this in a couple of previous entries where I conducted Tharp's interview with myself (that sounds a bit schizophrenic, doesn't it?). I think my computer and data management/manipulation skills are solid, so I know I won't have a problem in that area. My temperament is pretty even, although I do have moments where I lack composure. I believe that comes from an accumulation of negative feelings that I don't express. Then these feelings overflow and I express them inappropriately. This is something I've known about myself for a while, and something I really need to work on.

Other than that, I think my temperament is mostly good. I can work towards a goal for a long time and I tend to stick to plans that I make, so both of these indicate patience. I am a little concerned that I could get caught up in the excitement of having a trade on and think about it more than I really need to. Hopefully once I've traded long enough I won't focus too much on any open trade. Naturally I won't like taking losses, but if I can build a system in which I can have a positive expectation, I won't bail on it. That's a big emphasis of both Trade Your Way... and Way of the Turtle; when you do the work of creating a system yourself, you have much more confidence in trading it, which makes you less likely to quit on it.

Time could be an issue since I will only have about 2 good clean hours to devote to research and testing. I think I can make up for it by trading a system that's more long term in nature, although eventually I want to be able to trade more on a short term basis using automation. Of course that's a goal that will come later.

As for capital, I'm only willing to commit $100 right now. The good thing about OANDA is that I can trade very small amounts, so I can size my positions to any level of risk. I consider this to be an exploratory exercise, to see if I can become proficient enough to commit a higher level of capital someday. With this being such a small amount, I can afford to lose it all, which may very well happen.

I think that's a good first step today. Next time I'll work on Step 2.

What to Trade Continued

2009-12-31T12:04:00.003-05:00

So, I did a little more reasearch (I think that's all I do) and found out about E-micro currency futures. Basically these are currency futures that are a tenth of the size of a normal currency contract. In the case of a EUR/USD contract, the size is 125,000 Euro, but the E-micro contract is only for 12,500 Euro. This means you only need a tenth of the margin to trade an E-micro contract.

The real benefit to these E-micro contracts is that they are cleared by the CME, and the brokers actually match your trade with other traders - the brokers are not taking the other side of your trades. Also of benefit is that the prices are transparent as they are marked to market every evening so there is a clear "standard" price, unlike the retail brokers who can essentially make up prices.

Naturally I was excited to find this. If you want to do Forex trading, E-micro futures are much better than retail trading. But there is somewhat of a drawback. My $100 bankroll is not enough to starting trading these contracts. The initial margin for a GBP/USD contract is $392. So unless I have several thousand dollars of capital, I can't effectively trade these futures. I could wait and demo/paper trade until I've saved up enough, but who wants to wait?

So my initial excitement has become disappointment. The E-micro currency futures are clearly the way to go, but without the capital I can't take advantage of it yet. So I've decided to still try to trade in the seedy retail world until I can do futures.

I'll be back with more system development stuff next time.

What to Trade

2009-12-30T13:43:00.003-05:00

Before I get back into work on building a trading system, I need to explore some of my feelings the past few days regarding a decision of what markets/instruments to trade.

My initial ambition was to trade retail Forex. I also wanted to develop a system which could eventually be programmed and automated. MetaTrader 4 was going to be the platform on which I would program and trade. In doing research on MT4 for system automation, I discovered that the broker I wanted to use OANDA, does not support MT4 as a platform, but rather charges a hefty fee for access to their programming API for automated system development. So doing further research, I discovered a program called FXSpyder that lets you automate a system that would work with OANDA to make trades. The problem there is that FXSpyder charges a hefty fee to trade with OANDA. FXSpyder also supports FXCM to automate trades and that is free. Free is good, except that once I did reviews of FXCM, I found a lot of complaints about stop hunting, bad slippage, among other negatives. To be fair, I've read a lot of negative reviews about OANDA as well, but in the brief time I attempted to trade previously, I had no problems.

There are other brokers out there who support MT4 as a trading platform and don't have fees related to it, but I was really trying to avoid opening another account somewhere. I didn't want to go through opening another account and passing my personal information yet again out into the ether of the Internet. Plus, in further research I've learned more about just what retail Forex trading with a broker really is.

When you trade with a Forex broker, you are not interacting with an entire network of traders. Because there is no central clearing for retail Forex, there is no absolutely correct price for currency. Each broker gets feeds from banks and those become the prices, which won't always reflect what the broker is actually quoting to you. Brokers claim there is no commission and that they make their money through the spread, but really they can inflate the price they quote to you above and beyond what they get on their feeds from the banks. As a result there really is no transparent price when dealing with brokers.

In addition, when you trade with a broker, they are not matching your order with a buyer/seller on the other side. The broker itself is taking the other side of your trade, so they actually have an incentive to see you lose money. Your loss is their gain, hence the stop hunting, ridiculous widening of spreads during market volatility, or the delay in getting your orders through, etc. No wonder there are complaints about almost every Forex broker!

Initially I thought maybe these were disgruntled, losing traders attempting to place blame for their mistakes. However, the volume of grievances and their similarity give me pause. There must be some truth to this; would this many people complain otherwise?

There are people who make money trading retail Forex, so I guess the brokers can't be completely crooked. But as a rookie trader, do I really want to start out with the possible handicap of a less than scrupulous broker? Of course not.

So if all or most retail Forex brokers are potentially cheating me, what should I do?

Setting Objectives Continued

2009-12-28T13:55:00.007-05:00

The final set of questions Tharp presents are specifically related to how a trader will go about the business of trading. Once again, I'll answer the questions as best I can.

What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets or are there some illiquid markets you'd like to trade?

Primarily I want to trade the Forex market. It is extremely volatile and gives a number of opportunities to trade. I also like equities, but they take much more time to research I think. Eventually I'd like to do them both, but for now I want to focus on Forex.

To be even more specific, I want to start with the GBP/USD pair. From the beginning I wanted to trade this pair, probably because the GBP's exchange rate (1.6002) is larger than other pairs, meaning to take a position forces me to be more cautious.

Being a beginner, I'm only interested in liquid markets, so I won't be dabbling in exotic pairs or crosses. I'll leave those to the professionals.

What belief do you have about entering the markets? How important do you believe entry to be?

One of the ideas I love about trading in general is that the markets are composed of the hopes and fears of all of its participants, and with this collective psyche you attempt to connect. Your connection with the market allows you to be tuned in to its movements, to understand what it might be thinking, where it might be going. When you participate in trading or investing you are a part of the market.

I believe one can be successful in the endeavor of trading, but that the success will be hard-earned. I don't believe the market is necessarily an adversary to be contended with. I do believe that trading can be a key to self-awareness and discovery.

Entries are important, but having read Trade Your Way... already, I also know that having a high-percentage entry does not guarantee trading success. Some entries with a 40% success rate can be enormously profitable. Psychological resiliency is most important to help one stay objective and proper money management will ensure that one continues to have an opportunity to play the game.

Given your goals in terms of returns and drawdowns, what kind of initial risk stop do you want? If it's close, will you be able to get right back in the market so that you will not miss a move?

Part of the general canon of trader wisdom suggests that one always have a stop when a trade is on. Recently, however, I have come across some knowledge regarding Forex that makes me a bit leery to actually set a stop in a given trading platform.

A phenomenon known as "stop hunting" or "stop loss hunting" is the intentional movement of market prices by brokers to levels where a great deal of stops are placed (brokers know where your stops are when you put it on your trade) in order to close traders' positions. Forcing all of the stops generates revenue for brokers because they are trading against the traders' positions and forcing trader losses mean gains for them.

A Google search produces a litany of results, a lot of which express skepticism that the practice exists. Some feel their profitable positions are ruined because of stop hunting, others think unprofitable traders simply need a scapegoat for their poor performance and the brokers are to blame. Some acknowledge stop hunting but think its effect can be mitigated by placing stops away from the more likely levels. There are still other traders who use software plug-ins to mask their stops, or who trade on ECNs and thus avoid brokers altogether. Finally there is the group I think I may belong to, who believe that by not putting stops into a broker's platform, the broker doesn't know where your stop is, and therefore can't hunt it.

So when it comes to a question of initial risk stop, I will probably be using some kind of range indicator, but I won't be putting it into a platform.

How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives?
My initial thought is that I'll most likely be using some kind of trend trading system, so a reversal stop will be the most likely tool. While "you won't go broke taking a profit", you also won't realize the full potential of a winner. That's part of the trade-off of using a trend trading system; you won't get the confidence (i.e. "I was right") boost of lots of small victories, but you will hit the really big win on occasion, enough to hopefully dwarf the many little small losses sustained along the way.

What do you do in terms of money management (which I call "position sizing" in this book)?
I think I will most likely limit my exposure to a fixed percentage of equity, something like maybe 1%. I've also thought about maybe doing a fixed amount that represents a fixed percentage of my original capital, like $1 if I'm starting with $100. I'm sure as I get more into Way of the Turtle, I'll have a better idea of what I would like to do.

Next time I'll get into Chapter 4 of Trade Your Way..., which is about Tharp's 12 steps to developing a system.

Setting Objectives Continued

2009-12-25T17:23:00.002-05:00

In this next section of questions, I will attempt to determine what my objectives are so I can better aim my efforts in developing a system.

What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?
Later on in the book, Tharp gives a few examples of trading concepts. Trend following, fundamental analysis, seasonal tendencies, spreading, arbitrage, neural networks, and what he calls "there is an order to the universe" are the concepts he lists. I really think I will be engaging in some for of trend following, as it simply works. I'm also reading Way of the Turtle by Curtis Faith right now, so perhaps my eagerness to use trend following is a result of that reading. In his book, Faith describes his participation in an experiment in the early 1980s by 2 successful futures traders. In this experiment, Richard Dennis and Bill Eckhardt attempt to train a group of non-professional traders to use a proven trend following system. The results are surprising in that all the participants were taught the same system, but some failed and some prospered spectacularly. I haven't finished the book, but I think the reason for the disparity in performance is the psychological makeup of the participants. Some could work through the negative aspects of trend following and stay true to the system they were taught while others could not.

Anyhow, I'm sold on trend following right now as the way to trade. I'm also interested in contra-trend trading, but I'll need to do more research on that.

How much money do you have personally? How much of that money could you afford to lose? For example, most funds stop trading at 50%. How about you? How much risk can you afford to take on a given trade?
I'm not trading for a living so technically I can afford to lose all of my risk capital. I'd like to see what I can do starting off with $100 in my FX account. I don't want to risk any more than $1 on each trade. It would take 100 consecutive losses to put me out of the game. My idea is to find a system that can give me a positive expectancy with minimized drawdown, but with trend following, the drawdown can be psychologically devastating. One of the examples in Faith's book is of cocoa futures trades in 1999. A trend following system would have resulted in 17 consecutive small losses until encountering a big winner that would have put a trader in positive territory. I would really need to have faith in my system to handle that sort of losing streak.

How much money do you need to make each year? Do you need to live off that money? What if you don't make enough to live off? Can you make more than you need to life off so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?
Again, I'm not doing this to make a living. Its more of playing a game for me, one that, if I'm successful, I can scale up and use to really supplement my income. I have a full-time job and can stand to lose all my trading capital without any negative repercussions in my life.

Are you being realistic, or are you expecting to trade like the best trader in the world? For example, supposed you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just be chance, you could still easily have 10 losses in a row. Your system is still working as expected, but you could easily have 10 losses in a row. Could you tolerate that?
I know from experience that I definitely will not be trading like the best in the world. In fact, I actually expect to lose, maybe even all the trading capital. This is an extremely difficult venture in which there are very few winners, and even those winners will experience disaster occasionally. I read Reminiscences of a Stock Operator about Jesse Livermore, one of the best traders to ever live. He went broke several times in his career, the last of which prompted him to commit suicide. I can only hope that I can tolerate 10 consecutive losses, but I won't know until I get there.

Do you have the time to trade short term?
Given that I work full time, I won't be able to sit in front of the computer and trade short-term. I may be able to create an automated system that trades for me, and so I could remotely engage in short-term trading. That's not necessarily my goal right now, but it could definitely become a goal.

How much social contact do you need?
I'm an introvert by nature, so I really don't need a great deal. I like having someone to talk about my ideas with, but I don't need to be with people to feel happy.

Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?
I could work by myself. I'd prefer to have a handful of other people to talk to about my ideas, but not anymore than maybe 4 or 5. I don't think they would have a tremendous amount of influence on me. I like to chart my course and stick with it until I determine I need to change it.

I imagine Tharp is asking these last 2 questions of someone who is intending to trade full-time. Of course, they don't directly apply to me right now in my current ambitions.

In summary, what do you expect to make each year as a percentage of your trading capital?
Given that I don't exactly know what I'm doing, I'd be happy to not lose money after a year of trading. Tom Basso, the trader that Tharp is interviewing, answered between 20 to 40%. Basso is a professional and I'm not, so my goal is to make 10%. Very low, but still ambitious for a rank amateur.

What risk level are you willing to tolerate in order to achieve that?
Basso answered with 20%, about half the potential gain. So I guess I'll say the same thing, half the potential gain, or 5%.

What is the largest peak-to-trough drawdown you are willing to tolerate?
Basso answered 25%, so I'll go with that as well. I feel kind of stupid mimicking his answers, but as a newbie, I don't know what the answer really is. Once I go through a live-fire experience I should have a much better idea of what my real answers are.

How will you know your plan is working, and how will you know when it's not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?
With a trend following system, it could be hard to tell when the system is working given the possibly of a successful system still generating a large number of losses. My plan will work when I execute trades precisely as the system specifies despite the results. If the system is well designed with positive expectancy, then in the long run it will work. A trending market will obviously be good for a trend following system. A consolidating market will probably result in a few small losses and a volatile market will lead to a lot of whipsawing and lots of small losses.

The next section in Setting Objectives is working through Trading Ideas. I'll get to that next time.

Setting Objectives

2009-12-22T13:34:00.004-05:00

Chapter 3 of Trade Your Way to Financial Freedom is about setting objectives for your trading and creating a system to meet those objectives. Essentially you can't go anywhere until you know where you are going.

The first part of the chapter is an interview with Tom Basso, a trader, as an example of the self-assessment necessary to begin building objectives. I'm going to basically have an interview with myself where I answer these questions.

Self-Assessment

How much time during the day to you have to devote to trading?
My day starts around 7:45 (maybe an hour before that if I go to the gym) and I'm at work by 9 am. I work full-time, so I leave work for home at about 6 pm. There's an hour break for lunch when I normally go to the library and read or work on my trading blog. When I get home from work, there is about a 2-hour window for dinner and watching Jeopardy!, after which I might hang out with my wife, read, do housework, or just veg out until bedtime, which is usually sometime between 11 pm and 12 am. At most I have about 5 hours to spend on trading pursuits, but in reality it will be closer to 2 hours. Included in this is the fact that I can skim a little downtime at work to look at markets and read up on news.

When you are trading, how many distractions can you expect to have?
I don't expect a great deal, as most of the time on trading will be spent late in the evening at home or during the afternoon at the library, both with minimal interruptions.

How much time do you expect to devote to developing your trading system, to doing your personal psychological work, and to working on your business plan for trading?
Not having gone through a rigorous process like this before, I'm honestly not sure. I think a thorough assessment of my psychology and objectives wouldn't take a tremendous amount of time. I think I'm fairly aware of my limitations and strengths. I don't have a "business plan" so I'll more time to work on that. The mental work to create a system might be fairly quick, but the time to put it into practice will be considerable, particularly if I elect to program it using MetaTrader.
If I had to put a number on it, I think I could be ready to trade as early as February.

What are your computer skills? What skills did you need before you began this trading venture?
I have solid computer skills. I'm very comfortable with spreadsheets, database software, pretty much almost anything computer related. I can program in VBA and SQL as well as MQL, the proprietary language for MetaTrader. I'm going to skip that second question since I don't know if I've actually started a "trading venture" yet.

What do you know about statistics?
I know a fair amount about statistics including the basics (mean, median, mode, normal distribution, etc) and more advanced ideas like regression analysis, hypothesis testing, and sampling. I actually like statistics and put together a small study of FX prices during my last foray. I focused mainly on prices by tracking average movements by day and hour.

How would you rate your market knowledge? Here you should include what you know about trading mechanics, what moves the markets, how to execute orders effectively at low cost, which trading indicators you might need, etc.
From playing around in the FX market before I know about the bid-ask spreads and how to place different types of orders and how to use leverage. I know there are times when the bid-ask spread is so large that you can't trade at a low cost. I've done a lot of reading about technical analysis so I have an idea of what certain indicators represent and when they might be helpful. I think my knowledge is good for a non-professional.

What are your psychological strengths and weaknesses, especially in terms of trading system development?
First the weaknesses... I know I will lean toward trying to optimize test results to match the data set, attempting to get a perfect system. I probably will spend so much time trying to perfect any one idea that I won't work on other, maybe more promising ideas. I may not spend as much time as I should on understanding the principle I'm trying to exploit and focus too much on getting the code right.
For the strengths, I think I'm analytical and almost always looking for ideas. I'm patient and I like to do research particularly when it comes to data. I'm comfortable with numbers and doing data manipulation using spreadsheets and databases.

How about your strengths and weaknesses in terms of your personal discipline?
First the weaknesses again... I'm not very tolerant of failure or a lack of success, so I get down on myself quite easily. I focus so intently on details sometimes that I might miss a larger idea or goal. I tend to look for the potential negative in a situation before I will the positive aspects. I can be stubborn and unwilling to concede that my ideas are not working.
For strengths, I can work for a long time towards a goal. I can follow a plan pretty well. I'm usually deliberative, so I won't make rash decisions.

Do you tend to get compulsive (i.e., get caught up in the excitement of trading), have personal conflicts (i.e., have a history of conflicts with your family, at your job, or during past trading experience), or have any emotional issues that constantly crop up, such as fear or anger?
I have had times in the past where I did get into the excitement of having a position on that I didn't focus as much on what I was trying to do. I just enjoyed the fun of playing the game. I wouldn't go so far as to call it a tendency, though. I don't think I have a "history" of conflict as its intended by the question. Of course my wife and I have differences that lead to conflict but its far from an ongoing state for us. At times I get annoyed with work, but it is typically temporary in nature. As for emotional issues, I do get quite angry at times usually with work. Sometimes more broadly I feel anger, or maybe what be closer to disappointment with situations that aren't as I'd hoped or prepared for them to be. I think it would be nice to talk to a counselor or therapist, just to vent my feelings since I have a tendency toward not expressing my emotions. I try to stay level-headed as much as I can.

Based upon your personal inventory, what did you need to learn, accomplish, or solve prior to beginning trading? How did you do that?
That's a huge question. I don't think I know precisely what I need to work on to start trading, but I have an idea. The biggest thing is to curb the need to be right. Part of my personality is wanting to do thing the right way to produce the right outcome. I need to accept that quite often, I will be wrong. In fact, in trading, I'm probably going to be wrong more often that I am right. I think what held me back before is the fact that I focused on creating a perfect entry and was so discouraged when I found that most of my entries failed. Along with that need to be right is to be able to explain everything. Particularly in FX, things just move, sometimes without any accompanying news or reason. I think in the past I've let that fear of not knowing why things are doing what they are prevent me from continuing to trade.
I don't know how to overcome these things. I think part of the answer lies in blogging about my experience to reflect and process the goings on. I feel as if all I can do is keep trying to play the game.

Objectives will be explored tomorrow.

Judgmental Biases Continued

2009-12-21T13:13:00.003-05:00

Trading System Testing

The degree-of-freedom bias is essentially the over use of system development parameters to fit a set of historical market data. I think this is somewhat erroneously named, but I understand why Tharp calls it what he does. He describes a degree-of-freedom as "a parameter that yields a different system for every value allowed." So for a moving average, each different number used gives a different value, giving infinite degrees of freedom. When developing systems, it is quite easy to keep changing moving average, MACD, or RSI indicators to get the perfect fit for the historical data.

I think I fell into this when I designed my candle system a few years ago. I remember being dissatisfied with the results and tinkering endlessly to improve performance. Tharp suggests that truly understanding the concept you are using will reduce the need to optimize the system. He also suggests that you think about various scenarios your system could encounter and how the system might be expected to behave. His final suggestion is to minimize the number of indicators used.

Postdictive error bias involves using information for testing that you would could only know in retrospect, like a price high, which you cannot know unless you are looking backwards. This one is sort of hard for me to conceptualize. Tharp says that exceptionally good testing results are probably a result of postdictive errors. That makes sense as the better your testing results are, the more likely they are to be a result of fitting your system to your data.

Lack of protection bias is really just having a system that is too risky by not preserving capital, not providing for an expedient exit if the trade goes against you, and having low expectancy (which is a great topic Tharp addresses later).

I know I did this when I first experimented with FX, and later I replicated it in my Roth IRA with stocks/ETFs. Through the magic of leverage I would risk as much as 20% of capital in the FX, and I would risk my entire Roth in a single position. While I considered these to be playing around in the market (I keep real retirement and investment monies elsewhere in much more sensible allocations), what I did was silly for real trading purposes. I want to be much more conservative and smart when I try this again in the FX game.

How you Trade the System

The gambler's fallacy bias is probably one of my favorites because it seems so common-sensical. This bias simply leads you to believe that because the market (or game or whatever) has been trending in a certain direction, it is "due" to change. So because the last 5 coin flips have been heads, the next has a higher chance to be tails, or because the last 4 days have been down on the Dow, the next day should have a higher chance of being an up day. To coincide with this belief is the tendency to wager a greater amount on that next iteration of the game, so you'll bet even more now since the market/game is more due for a change. Needless to say, this bias can take you out of the game very quickly.

I think I fell victim to this on the first FX go 'round. It just makes too much "sense"! Mostly this did me in because of the poor position sizing aspect of it. I'm finally learning that one should size their positions using a consistent methodology and not based on the idea of what the market should do, completely ignoring the element of randomness.

The conservative with profits but risky with losses bias is pretty much exactly what it says. I know I'm guilty of this one. The tendency is to take a win as soon as things go against you, but hold on to a loss in hope of it coming back. From later readings in the book, I've learned that taking a high percentage of losses is okay but only if you cut those losses short. I think this is highly related to the next bias.

"My Current Trade Must Be a Winner" bias is exactly what it says as well. This one is definitely a downfall for me, because it is extremely difficult to admit that you made a bad decision, or your analysis was flawed. Predictions speak to the ego and to be wrong is to take a hit to that ego. But as Tharp says "being right has nothing to do with making money."

Judgmental Biases

2009-12-18T13:36:00.006-05:00

In the second chapter of Trade Your Way to Financial Freedom, Tharp talks about the mental filters that we use to parse the vast amounts of information with which we are bombarded everyday. These judgemental heuristics allow us to reach conclusions which often coincide with our already established notions, making it difficult to re-examine our conclusions. Tharp breaks these biases down into those that affect system development, testing systems, actually trading a developed system.

System Development

Representation bias is when "people assume that when something is supposed to represent something, it really is what it is supposed to represent." Tharp goes on to give an example of a daily bar chart. Of course the bar represents the day's movement, but its really a line on paper, not the market itself. You would need to know volume, the number of new/old positions were opened/closed, the number of trades that took place and at what prices, the number/identity of large institutional or small retail investors placed trades, the number of long/short positions, opinions of market movement, etc. to truly know what the market was doing that day.

In short, it would take a lot of information and time to get an accurate picture of the market on a given day. So naturally we used a line on a chart(s) to try to distill all of that information into a managable item. Even if you could process all of the information in its raw form, what would you do with it?

Reliability bias is assuming that the data we use is reliable. I know for myself that it often is not. I remember looking at FX prices from Oanda side-by-side with those for the same currency and time period from MetaTrader. They did not agree. I've also seen beta calculations and P/E ratio calculations for stocks from various free online sources and seen a disparity. Vendors use different methods to produce their results and so what they produce may not be as reliable as you might like.

Lotto bias is having a feeling of increased confidence from manipulating data, feeling that your maniuplation will lead you to control over the market's movements. I'm extremely guilty of this one. I often think that if I can find the right series of manipulations to any given set of data, I can make a really good guess at what will happen. Its a sneaky psychological effect that says "because I have seen some information and put my special touch on it, I can control what will happen." I guess the name of this bias comes from playing a lottery where you pick the numbers, feeling as if picking the "right" numbers increases your odds of winning.

The bias of the law of small numbers is when you see a few examples of a particular methodology working and generalize that this particular methodology is successful. Unfortunately you don't spend the time to examine it in all circumstances to see how truly successful it is. I'm guilty of this based on looking at charts for technical cues. I love to try to read candles, and when I spot a few successful patterns in the books or even in real charts, I think they absolutely work.

The conservatism bias is when, after establishing an idea in our mind, we are unwilling to examine conflicting evidence or ideas. I'm sure that I'm guilty of that one, or at least I don't have a visceral reaction telling me that I never exhibit this bias.

The randomness bias is a belief that market prices move in a random fashion and the erroneous assumptions about what that randomness might mean. Tharp argues that while academic studies have shown that markets are random (I'm thinking of Malkiel's Random Walk Down Wall Street - I need to read that one day), there are extreme tails in the market's distribution that would not arise from normally distributed random prices. Tharp further argues that the greater extremes in price movement lead traders to underestimate risk. Tharp goes on to say that if markets are random, then traders misinterpret what that randomness means. When they see a long trend in a price series, their natural inclination is to create a theory to explain the trend, which would lead to seeking patterns and establishing causal relationships. This also leads to trying to pick tops and bottoms in the market.

This one probably pertains to me in that I have been obsessed with finding the highs and lows in markets, trying to find the turning points. In fact, the last FX system I tried developing was to find candlestick patterns for turning points. Needless to say, it didn't perform well.

The need to understand bias is definitely a sore spot for me. This relates to the need to theorize on why markets are doing what they are doing. I've had countless conversations expressing confusion at various market behaviors, usually in the face of some bit of fundamental news, like a better than expected earnings report. I had a conversation just this week about the stock market's sell off in the face of news that the Fed will continue to leave interest rates at a record practically zero level. I think the financial media has an awful lot to do with this, as everyday they tell us "why" the market moved the way it did, and they do it as if they have analyzed the situation and can pinpoint exactly the reason. So we think there is always a reason, and we always go looking for it. Of course by "we" I mean "I".

I'll get into the other biases in the next post.

A New Beginning

2009-12-17T13:22:00.003-05:00

I just finished reading Trade Your Way to Financial Freedom by Van Tharp and it helped to rekindle my interest in the trading game. Tharp proposes that the biggest determinant to success in speculation is the individual psychological makeup of the trader himself. While this is clearly quite obvious, the very plain nature of this fact causes me to overlook the task of figuring out just what my own psychology is and how to adapt it to trading. I think I've gone through so many fits and starts when it comes to trading because I didn't spend the time examining my own mental state, strengths, hang-ups, etc. I spent more time on trying to create a system, a "Holy Grail" to make profits. Tharp talks about a Holy Grail too, but not as some construct that is external to the trader, not as a system just to find trades and enter/exit positions. The Holy Grail Tharp speaks of is an integration of the trader and whatever means he uses to trade, an acknowledgement that everyone has their own Holy Grail and that the way to find it is to truly search the depths of one's own psyche and use the findings as a guide to trade.

There are several reasons why I'm drawn to trading, but one of the biggest is the idea that it can be a means by which to come to truly know myself. It involves so many of the emotions that drive us like fear, greed, hubris, exultation, and disappointment. For me its almost a romantic notion, one of matching wits with this nameless and faceless entity called simply "The Market", knowing that odds are overwhelmingly against me. But then I think about those few who are successful and I wonder if I can be successful, too. Do I have the "right stuff" to be a successful trader? Can I learn to be a successful trader?

So that's why I can't seem to shake the trading bug. I read about it, I talk about it, sometimes I even dream about it. I want to experience self-discovery through speculation in financial assets. I want a window into my true inner-being, not who I think I am, or who others tell me I am. I think trading is the way to get there.

The Candle Expert

2006-10-01T22:51:00.000-04:00

I've been away for a while, but not without purpose: I've been working on an automated trading system based on the identification of the hammer and hanging man candlestick patterns. I'll post my results of testing this week, along with comments.

It looks as if the Cable took a tumble this past week, falling from 1.9070s down to 1.8720s. According to my longer term daily charts, the consolidation of the Sterling could be complete, and price may be breaking lower. This is more of a long term concern, however, and may not have as much of an effect on tomorrow's action.

4Cast seems somewhat indecisive on what the action will be tomorrow, although it seems slightly bearish. With this in mind, I'm selling the Cable at 1.8630, which is the previous swing low.

Happy pipping!

Slow Week For Me

2006-09-15T22:49:00.000-04:00

Due to the pressing concerns of the job and academia, I was unable to make as many entries as I'd like this week. I'll keep working on this, I promise.

In the meantime, my idea to have opposite limit orders ready for Wednesday's trading day didn't get tested as price , so there are no new trades to update.

Today's fundamental news was bad for the Cable, sending it to slightly north of 1.8800, down from 1.8920. I don't know if this will carry through to next week. I'll check in Sunday night to take a look.

In other news, I'm planning on downloading MetaTrader and playing around with the programming interface to create an automatic trading system. Might as well play around with some code and put that undergraduate education to use.

That's it for now, I'm sorry for not being more informative.

A Winner!

2006-09-12T23:27:00.000-04:00

Looks like Monday's trade was another winner! S1 provided the support, and I think the 1.8600 "Double Zero" support might have kicked in as well. I took my 30 pips on the bounce.

What happened today? Higher than expected UK CPI pushed the Cable higher this morning, about 100 pips higher, from 1.8650 to 1.8750, where price currently hovers.
The 4Cast outlook for tomorrow doesn't see much movement for the Cable, despite some UK employment data due out. I'm going to trust in the pivot points to get me through the day tomorrow. I'm going to try a technique where I'll buy if price hits S1 1.8669, and sell if it hits R1 1.8780 and I'm putting both limit orders in at the same time.

Here we go...

What a Week!

2006-09-10T21:39:00.000-04:00

I miss a few days of Forex action, and the GBP/USD pair falls almost 500 pips.

What's the reason for the monumental sell-off? Well, as best I can tell, there are four main contributors:

Service PMI breakdown
Big oil discovery in Gulf of Mexico
UK Industrial Production on the median
Turmoil around the imminent departure of British Prime Minister Tony Blair

What's good is that I forgot to actually place the order I described in my last entry. And its a good thing too, I would have given up some pips.

The next question is what's coming up this week? Well, we have Retail Sales coming out on Tuesday 9/13, and CPI on Friday 9/15. Perhaps a better than expected Retail Sales report will scare folks into thinking the Fed will raise interest rates, or lower than expected CPI would do the same. Either situation will result in the Sterling falling further.

My plans for tomorrow are to buy at 1.8625, as it is support according to my consolidation chart:

The T/P is set at 1.8655, the S/L is set at 1.8895.

A Winner!

2006-09-04T21:48:00.000-04:00

Looks like my idea of shorting the Cable expecting it to slip in rangebound trading turned out to be a good one (that's hella rare):

What's on tap for tomorrow?

As best I can tell, nothing!

I firmly believe that in the absence of fundamental data, the technicals rule.

With this in mind, seeing a negative divergence (is there such a thing?) on the MACD and seeing that price is currently at 1.9034 and a pivot point at 1.9058, I expect the Cable to fall and then rise. I'm putting a buy in at 1.9020 with a 25 pip S/L and T/P. Let's hope this pivot point stuff is working tomorrow.

Labor Day Weekend Nears an End

2006-09-04T14:19:00.000-04:00

How ironic - give workers a day off and call it Labor Day!

But, unlike a great deal of America's workers, Young Pip is here, working hard as ever on understanding the Forex universe.

The Cable has been rangebound today, hovering between 1.9040 and 1.9070.

The good people at 4Cast expect the Sterling to slide, so I'm putting in a sell order at 1.9070 with a S/L and T/P 20 pips out.

That's all I have for today.

Keep on pippin'!

Good Idea, Bad Execution

2006-09-01T11:54:00.000-04:00

My sell order from last night didn't get filled, which is fine. I actually expected that.

So I waited until this morning to get in on the US employment news release. The data came in where it was expected, with 128K Non-Farm payrolls and 4.7% unemployment. Since this met expectations, I expected the Cable to fall, and sure enough, it did. I put a sell order in, but the OANDA game server froze. I didn't get my order filled when I wanted it to. When I decided to close the order because I couldn't get an update to the order, I didn't know where it would close. Turns out it was at 4.5 pip loss. Bummer.

So I had the right idea, but technical limitations prevented me from getting what I wanted. The Cable sank from 1.9060 all the way to 1.8960 before righting itself and returning to 1.9060. I think the -1.2% from the Construction Spending data that came out at 10:00 AM might have contributed to the recovery. If you did things right, you could have gotten about 200 pips round trip.

I'm almost tempted to put an order in now to buy if the Cable falls to 1.9020, but given the weekend is rapidly approaching, I don't want to get caught with an open position. I'll just have to miss out on this one.

Have a good Labor Day Weekend.

A Foolish Whim

2006-08-31T23:44:00.000-04:00

Before we get to my latest Forex blunder, I'd like to review yesterday's events.

As noted in my previous entry, my returning trade was successful. I got in as price gradually rose higher, met with heavy selling (my selling), and then repeated the cycle again. After the release of the US 2Q GDP data at 8:30 AM, the Sterling went as high as 1.9062. While the 2.9% GDP growth is close to the 3.0% the market expected, the data revealed that the US economy did indeed slow during 2Q, a far cry from the 1Q growth around 5%. A weaker US economy means a weaker dollar, so folks bought up the Sterling.

The pair hovered between 1.9030 and 1.9060 before running out of steam just shy of 1.9100 at 1.9093. I've often heard that support/resistance lies at the double zeros; I believe that came into play here. Shortly after stalling out, US personal spending data came out stronger than was anticipated, and this sent the Cable plummeting to test 1.9000. I guess news of the dollar's demise was greatly exaggerated, leading traders to sell the Cable. It rebounded to hover between 1.9050 and 1.9030.

It is at this point that our genius trader decided to short the Cable again in an effort to repeat yesterday's success. Nevermind that the level I previously targeting as resistance had become support since the Cable's rise, I shorted and lost 20 pips. It was also an after-hours trade, something I rarely do.

What's on tap for tomorrow, the first of September? We've got Non-Farm payrolls coming out at 8:30 AM. The market expects 125K, and the folks at Briefing.com are expecting 120K. A lower number would indicate the US economy is indeed becoming sluggish, perhaps prompting the FOMC to refrain from an interest rate hike in their next meeting September 20th.

I have the day off tomorrow (just had to stretch that 3-day holiday weekend into 4), so if I get up early enough, I may try to play the news. If employment comes in significantly lower than expected, I'll be buying the Cable. Other than that though, I'm going to be putting a buy limit order in at 1.9024, except I'm expanding my order to 30 pips for S/L and T/P; I want to make sure that the trade survives a minor incursion below 1.9000. On the upside, I'll end up near where price idled today.

Here we go...

A Winner

2006-08-31T00:35:00.000-04:00

Yesterday's trade was a winner. I would elaborate more, but it is WAAAAAAAY past my bedtime. More to come tomorrow.

Back From the Forex Dead

2006-08-29T21:59:00.000-04:00

Okay, I really mean it this time.

I'm back.

I've missed quite a bit in my absence, from the cessation of the Fed's seemingly relentless interest rate hike campaign to crude's rise on fears of political instability in (where else?) the Middle East to crude's latest trip below 70$ a barrel. Rather than spend an inordinate amount of time on getting caught up on the goings on, I'm just plunging right back into it.

US Consumer Confidence data was released today, and apparently, US consumers have NO confidence. The lower than expected 99.6 for August is the lowest since last November. This sent the GBP/USD pair 100 pips lower before the release of the minutes from the Fed's August 8th meeting sent 100 pips higher again, back to where it began the day.

Tomorrow sees the release of premliminary Q2 GDP at 0830 EST, with the market expecting 3.0% growth. The people at 4Cast don't see the Cable doing much tomorrow, maybe even slipping a little. I agree, seeing that the Sterling is near the 100% Fib retracement of the early April low. I'm putting an order in to sell if the pair hits 1.9022, with a take-profit of 1.9002 and a stop-loss of 1.9042.

Here's hoping for a successful return.

Welcome Back, Young Pip!

2006-06-25T22:43:00.000-04:00

What's been crackin' since I was here last? As I recall, the Sterling was on a tear, pushing 1.90, and not only did it fail to push beyond 1.90, its beginning to regress a bit. Next week the FOMC will meet and likely raise interest rates again, giving the USD an upward move against the GBP. The rate hike has probably already been priced in, maybe being reflected in the Sterling's downward movement late last week, and later in the preceding week. There was probably other data involved in the decline as well.

The Cable is nearing the 50% retracement of its mid-May high, but I don't believe it will provide any support. Therefore, I am shorting the GBP. I'm putting a limit order in at 1.8190 for 30 pips stop-loss/take-profit. Man, its great to be back in the saddle!

I Haven't Abandoned Forex, Honestly!

2006-05-25T00:38:00.000-04:00

I've been way to busy for myself the past 2 weeks! The MBA taskmasters are taking their due out of my hide and my time. Work has also been bananas, so I haven't had the will or energy to continue my forays into the world of Forex. I hope to squeeze in a real entry sometime over the quickly approaching Memorial Day Weekend.

Keep on Pippin'!

Weekend Recap

2006-05-14T22:43:00.000-04:00

I thought I'd check in and update the world on my latest Forex exploits.

Clearly my Thursday idea to sell fell through, as the market decided it was done punishing the Cable because of the Fed's decision to raise interest rates. Unfortunately my decision to spread the stop wider resulted in a bigger than usual 40 pip loss. But all was not lost, as I did get a winning 20 pip trade in around 8:30 AM.

The Sterling has continued its tear as it approaches 1.90, its highest level since April of 2005. Its already encountered resistance at this level, and may continue to do so, according to the report by 4Cast. Right now, the Cable is at 1.8960. Here comes another of my genius ideas: buy now, and exit trade at 1.9000.

We'll see how this one turns out...

Fed Day

2006-05-10T21:29:00.000-04:00

The big news today is of course, "Big" Ben Bernanke and the Federal Reserve Board's decision to raise rates for the 16th consecutive time, pushing the funds rate to its highest point in 5 years. (News coverage) Future rate hikes will depend on economic data indicating an increased threat of inflation. I imagine that will place even more importance on forthcoming fundamental data between now and June.

On the Forex market, particularly our currency pair of interest GBP/USD, the rate increase brought out the action. The market was slow until the news came out, at which point the Cable slipped, rebounded, and has been in a steady decline since.

I see an easy trade coming up, as the European market hasn't had a chance to react to the rate hike en masse. After they push it lower in the wee hours of the morning, price will probably continue its previous upward movement. I'm putting my trade in now: I'm stepping out of my comfort zone a little and going for 40 pips. S/L at 1.8584, T/P 1.8504.

I almost neglected to mention that I did some impulse trading at the time of the Fed announcement. This time I got off lucky, posting a 15.6 pip gain. I should probably make a rule not to do that in the future.

1 Winning Trade,
+15.6 pips

A Quiet but Winning Tuesday

2006-05-09T22:32:00.000-04:00

My trade went well today and netted me 30 pips. Good times, indeed.

There wasn't very much fundamental data to come out today. Tomorrow, however, "Big" Ben Bernanke will meet with his FOMC coevals to raise the fed funds rate for what most are forseeing as the last time after 16 (?) consecutive rate hikes. I think this will cramp the Sterling's style briefly, but this won't happen until 2:15 pm tomorrow. After that, there will be some downward pressure on the GBP/USD pair for Thursday's European session.

What should we do? The prudent speculator would most likely stay out of the market tomorrow, as volumes will most likely be low ahead of the rate announcement. I'm going to play the conservative card and sit tomorrow out, at least until shortly before the rate announcement. It's really tempting to try to get a trade in early, but I'm going to resist the sweet temptation! I know enough to know my own greed will always be my undoing.

With that, Happy Fed Funds Rate Hike Day!

(Hopefully it will be the last one for the forseeable future.)

Start of Another Glorious Week

2006-05-08T21:10:00.000-04:00

Another week is upon us...

Friday's trade didn't go quite as planned. After my buy order got filled, the Sterling was confined to the 1.8470ish to 1.8525 range, which was enough to hit my 30 pip S/L. When the 8:30 am US jobs report came out weaker than expected, price rose rapidly to 1.8620s before closing just shy of 1.8600 for the week.

To start this week, the Cable went as high as 1.8690 before retreating to its current 1.8580 level. How much higher can it go? The Fed seems to be moving toward one more rate hike on Wednesday, which will probably cause a temporary setback for the Sterling. After that, who knows? The good folks at BabyPips.com see price finding support at its current position, and even pushing higher to 1.9200. Graph courtesy BabyPips.com.

On a much shorter timescale, what's going to happen tomorrow? Not much on the fundamentals. I wouldn't be surprised if volume slowed down some what in anticipation of the Fed's rate decision on Wednesday. More importanly, the markets will be closely watching to see if there are any indications of continued rate hikes or if the Fed will stablize the rate. I expect the Cable to rise tomorrow, but not exceed Monday's high. Therefore, I'm buying at the pivot point of 1.8610, and setting my T/P and S/L 30 pips out.

Good night and good luck.

Quiet Thursday

2006-05-04T21:50:00.000-04:00

Bummer! My buy limit order was cancelled just before the Sterling made my move. Had my order been filled, I'd be 30 pips richer right now.

Anyhow, the Bank of England left rates unchanged, which had pretty much no effect on price. However, at 2 PM something happened, as price shot through 1.85 on its way to 1.8550, before falling back to around 1.85. Despite my desperate searching to find the catalyst for this movement, I can find nothing.

I have concluded, however, that the Cable is still good for buying, despite it having already encountered resistance near 1.8550. 4Cast feels that price will rise before retreating again, and I agree. Therefore I'm buying at 1.8515, with a T/P and S/L 30 bps out from there.

I know I sort of ignored the presence of fundamentals for this trade, the practice of which is unadvisable. But given the US market's strange 2 PM action, I think the European market will do the same when given the chance. Therefore I'm hoping the Europeans will give the Cable a buying boost before the news comes out.

See you tomorrow.

A Winner!

2006-05-03T20:47:00.000-04:00

I love it when a plan comes together! I got my 30 pips after my buy order got filled; from the looks of things I could have ridden the Sterling higher to R1, near 1.8476, another 40 pips. I'm not complaining, though, as I did get something for the trouble.

The Cable was range-bound today between 1.8342 and the 1.8475 area. This is no doubt due to the major resistance to be found at 1.85, as double-zeros seem to make traders jumpy. Judging from the info to be found at 4Cast and FXCM, this area will continue to mark a consolidation point in the meteoric rise of the Cable. And given that price today obeyed the 1.8476 level, I will be buying tomorrow and selling near the 1.8475 area. Hopefully my order will be filled and closed before the Bank of England renders their interest decision tomorrow around 7 AM EST.

I'm buying at today's pivot point at 1.8413. I'll take profit at 1.8443 and stop the loss at 1.8483.

After 1 trade today,
+30 pips.

Its Tuesday Already?!

2006-05-02T21:27:00.000-04:00

Man, this week has absolutely blown by! I managed to stave off the hobgoblins of inconsistency and laziness for a while, but they seem to have the run of the place lately. I managed to keep this blog semi-updated for an entire month, which is pretty much a major victory for me.

Anyhow, last Thursday my trade idea was never filled, so there's nothing new to report there. The Cable has been on a serious bullish run of late, breaching January's high in the 1.7900 neighborhood, and even moving on up to 1.8400.

Apparently the news has been bad for the dollar recently, and its taking a beating. Broader economic factors like the above $3 a gallon gas surely cannot be helping. Then there was yesterday's "Day without an Immigrant" where the newest Americans decided to stay home and not spend money. So there's all kind of stuff going on.

Where the Cable is headed from here is anyone's guess, even moreso than usual. 4Cast is looking for some 1-2 day drifting slightly higher, but without any major moves. 1.8500 is the next level of technical resistance going back to last September's high. I should probably sit tomorrow out, but I'm getting a good feeling. While a retreat is probably not too far off, in the near term, I'm buying. Price is currently around 1.8400, and when it gets near 1.8407 (mid point between pivot point and R1), I'm buying. 30 bps stops and losses in respective directions.

May Recap:
9 Trades, 4 Winners
-29.5 pips

I'm Ba-ack!

2006-04-26T21:39:00.000-04:00

I apologize for being incommunicado of late. Late last week I was out of town, and by the beginning of this week, I was suffering in the throes of some maniacal flu/cold-like illness. I'm just now recovering and regaining enough strength to resume my job, which is informing you of the magic, the misery, and the mystery of Forex.

My last trade on 4/18 didn't go as planned. My buy order got triggered, but price fell, hit my stop 20 pips later, then reversed field like soon-to-be-NFL #1 Draft pick Reggie Bush on his way to paydirt.

It appears that in my absence the Cable has been flirting with, but falling back under the 100% fib retracement of January's high. I don't know what fundamentals were in play from late last week to now, and to be honest I really don't feel like researching to find out.

What's jumping off tomorrow? Looks like US Initial Claims and US Help Wanted Index. Also important is Fed-Head "Big" Ben Bernanke testifying at 10 am. I'm still hoping to take advantage of the Sterling's reluctance to break completely through the 1.7920 - 1.7940 range. I'm putting a sell order in at 1.7914, T/P at 1.7884, at a stop-the-bleeding at 1.7944.

Until next time...

Friday 4/14, Monday 4/17 Recap

2006-04-17T21:40:00.000-04:00

Well, there isn't much to recap from Friday, as the markets were closed. I had a feeling they would be, but had a limit buy order in anyway, an order that got filled Friday morning. I did 2 things I intended not to do: trade on a day when the market was closed and let a position stay open through the weekend. Anyway, it worked out well, as the position closed at my T/P of 20 pips on Monday morning.

The GBP/USD pair made a serious bullish break on Monday, spurred in part, according to 4Cast by

TICS data for February - for whether there is "sufficient" foreign capital to finance the US deficit
tomorrow's Fed FOMC For March 27-28 - the first meeting under new Chairman Ben Bernanke - for signals as when Fed will pause - 4.75% or 5.00%
Wednesday's US CPI for March for indications of inflation
Thursday April 20 Summit between Chinese Pres Hu Jintao and US Pres George Bush

The pair first tested the 50.0 Fib before finally breaking through, and then extending up through the 61.8 Fib. With a 1.7448 high, the Sterling hasn't seen this level of price since late January. The pair is also looking to be breaking out of a yearlong consolidation. Of course, we'll need confirmation of this, but 4Cast says the Cable has exceeded its 200 DMA.

I'm not sure what kind of long-term support the Cable will have at the 61.8 Fib, but it does have support at the 1.7625 - 1.7500 range, which marked the high for the range the pair traded in since late January. This week will be busy with fundamental data, starting with tomorrow's Building Permits, Housing Starts, and PPI at 8:30 EST. Also, tomorrow afternoon at 2:00 EST the FOMC Meeting Minutes from the March 28 meeting will be released.

I'm going bullish tomorrow, hoping to capitalize on any "afterglow" good feelings early by buying at 1.7720 and looking to take profit at 1.7740, slightly lower than Monday's high. The S/L will be at 1.7700. Hopefully this will get me out of the market before the news hits.

Recap From Last Week:

4 Trades, 3 Winners, +40 pips

Recap Since Inception (4/1/06):

8 Trades, 4 Winners -9.5 pips

Another Winner!

2006-04-13T23:06:00.000-04:00

I claimed my 20 pip target, but again, I left another 20 pips on the table. It seems I need to really do some research into where I decided to set profit targets. It could also be of benefit to probe for signs of additional trades, as in the case of today's action, price reversed at S1 - it's possible to ride the wave back down, too. That would have been good for another 40 pips.

Better not get too greedy too soon, however.

Today's US Data must have briefly sent the Sterling below the 38.2 Fib, but it recovered and is currently hanging out just above it at 1.7519. Tomorrow is Good Friday, which means there could be a lack of volume, so I'm going to be conservative. There doesn't seem to be a great deal of data coming out, so I'm going to buy now, take profit at 1.7539, and stop bleeding at 1.7499. Now that I think about it, that's what I did for the previous 2 successful trades. No need to switch it up now.

Thursday's Action:
1 Trade, +20 pips

Finally, A Winner!

2006-04-12T22:04:00.000-04:00

I think I was on a 3 trade losing streak until today. I actually could have taken this trade to all the way to R2 and slightly beyond. In fact, I left close to 40 pips on the table. Clearly I could learn to set the profit targets better, but I'll stick to my conservative approach for the time being.

The Sterling fell on below expected US Trade Surplus in February of $65.7 B, which is down from January's $68.59 B. It found support at the pivot point and and since settled under the 38.2 Fib retracement.

There's a plethora of US data being released tomorrow:
US Retail Sales Ex Autos (Mar) 13:30
US Retail Sales (Mar) 13:30
US Import Prices (Mar) 13:30
US Export Price (Mar) 13:30
US Initial Claims (8th Apr) 13:30
US Univ of Mich Sent.(P) (Apr) 14:45
US Business Inventories (Feb) 15:00

With this in mind, I expect the market to sit tight, be a bit range bound... could be a good time for harvesting pips. My trade will hopefully be triggered and closed by the time the news comes out. I'm buying near the 38.2 Fib retracement at 1.7520, with at T/P at 1.7540 and a stop-the-bleeding at 1.7500.

Tuesday Recap

2006-04-11T23:08:00.000-04:00

My trade may have been a good idea, but again failed in the execution.

On the European open the Sterling went from 1.7460 to around 1.7395. Unfortunately, my sell order was triggered at 1.7410, and since my T/P was at 1.7380 (S1 and Monday's low), it was never reached. Good idea, bad timing, it seems.

On the whole GBP/USD had a bullish day, even reaching and exceeding (at least for now), the 1.7500 level. Its very near the 1.7516 38.2 Fib retracement of January's high, and should it reach and exceed that level, I'm buying. The entry is 1.7522 (R1 for Tuesday's pivot point), T/P is 1.7542, S/L is 1.7502.

Tuesday's Totals: -20 pips

Weekly Recap

2006-04-10T23:29:00.000-04:00

Friday's big news, the US non-farm payrolls, came in higher than expected at 211,000 I believe. This sent the Cable plummeting from around 1.7500 to a low near 1.7400 for the day. I didn't make any moves on Friday, so I missed all of the action. Perhaps next time I will avail myself of the opportunity to make some profit.

I finished last week down 50 pips. I'm hoping I can erase the deficit this week.

On to Monday's action...

There really wasn't much going on. The Cable spent most of the day between 1.7420 and 1.7470, briefly falling to 1.7380 near the end of the European session but returning to above 1.7420 before the end of the American session. Terribly uneventful stuff with no fundamentals to muck up the situation. Also probably a good time to get in some good trades, I'm beginning to believe.

As best I can discern, there shouldn't be any weighty fundamental news coming out tomorrow. Given the Cable's recent bearish performance, and 4Cast's short-term bearish prognosis, I plan on selling the GBP/USD pair when price if it hits 1.7410, just below today's pivot point. I'll take profit at 1.7380, Monday's low and S1 based on Monday's data. I'll stop the bleeding at 1.7430.

Back from a Brief Repose

2006-04-06T21:54:00.000-04:00

Wednesday's trade didn't go quite as planned.

I felt good about the trade, seeing the positive momentum generated by the Cable after Tuesday. My buy limit order got triggered just past the 50.0 Fib retracement of January's high, near 1.7600. It got as high as 1.7616 before reversing on weaker than expected Industrial Production and Service PMI numbers. Hmmm... the same data that I had no idea what it was. Anyhow, my trade got stopped out in the reaction to the data.

The Cable then settled around the 38.6 Fib retracement - a position that has provided support in the past. Around 1000 EST ISM Non-manufacturing data came out stronger than expected, pushing the Cable a bit lower. It hovered around the 1.7500 level near the pivot point from Tuesday before rising above the 38.6 Fib retracement and middling out between the 38.6 Fib and 50.0 Fib. Early Thursday, price bounced off the 38.6 and made a dash for 50.0 before bumping its head on the 50.0 Fib. It fell lower to 1.7500 and has been confined between 1.7490 and 1.7530 since.

What have we learned? For one, be aware of fundamental data's presence and how it can screw up your carefully planned trades. With the possibility that the data can go for or against your trade, should even bother having an open trade when fundamental data is to be released? Should you just sit and wait until news is released, then follow the movement of price? I guess these are questions each trader individually has to answer.

We've also learned that the 38.6 Fib is support for the GBP/USD pair, while 50.0 Fib is almost ironclad resistance. When price is hanging out between the two, the opportunity to harvest pips is very good.

Big news tomorrow: US Unemployment and Non-Farm payrolls. Market expects 4.7% on unemployment and 190,000 on Non-Farm Payrolls. I'm going to try trading in the wake of news tomorrow. Data will be released at 8:30 EST, so before I happily march off to work, I'll watch CNBC, see what the numbers are, then I'll ride the wave. Stop losses and take profits will be based on the Fib numbers. Wish me luck!

After 1 trade
Score (in Pips)
Market 25, Young Pip 0

Good and Bad News

2006-04-04T22:38:00.000-04:00

Of course, the good news first:

My buy limit order was filled around 3:15 EST at 1.7405 and by 3:30 EST I'd gotten my 25 pips profit target. The Cable continued to climb into the 1.7455 range 4Cast predicted, which marked R1 from Monday's pivot data. It hung out in the 1.7440 to 1.7470 range from 4:00 EST to about 8:00 EST. It seems that Monday's bullish momentum carried the Cable higher on the European open, at least to R1. By 8:00 EST, American traders came to work, probably saw the overnight upward movement, and decided the Cable should go higher. So they bought, sending the Cable clear through R2, and through the 38.2 Fib retracement of January's high.

Here's where the bad news comes in:

Seeing the price fall around 8:30 EST, I made like Nostradamus and tried to call the top of the rally. I sold at 1.7513, right near the 38.2 Fib retracement. This was stupid for several reasons I will now enumerate:

First and foremost, I traded against the trend. This is a serious no-no boys and girls!
Given that the Cable had already exceeded the 38.2 Fib, its more likely to act as support, pushing price higher.
When there's no fundamental data to move the markets, technicals will rule the day. There was absolutely no reason for a fallback given Monday's rally and the upward trend already established for the day.
I could have at least looked for some confirmation before selling.

While this trade ended badly with a 30 pip loss, at least I used our good friend the stop limit, and those 30 pips bought me much needed knowledge and wisdom.

Looking ahead to tomorrow, there's a little fundamental data coming out on the USD. At 10:00 EST, ISM Index and Services comes out. I'm not entirely sure what it is, let alone its importance. Guess we'll see. There's also some data from the UK out in the wee hours, about 4:30 EST.

From a technical perspective, the Cable is nearing the 50.0 Fib retracement, a level that has provided resistance on 2 prior occasions. However, the folks at 4Cast seem slightly bullish, and the pair will close for Tuesday above the yearly upper trendline. Could this be support for the big move I see happening soon?

Either way, given the rally thus far this week, I'm looking for the trend to continue. I'm putting a buy limit order at 1.7600, stop loss at 1.7575, near Tuesday's high. Take profit is at 1.7625.

2 Trades Today

Market 30, Young Pip 25

All Quiet on the GBP/USD Front

2006-04-03T22:17:00.000-04:00

While there was a 100+ pips worth of action on fundamentals Monday, Tuesday is shaping up to be a quiet day. There will be very little fundamental data to move the market. I would think (in my rookie state) that when there are no fundamental monkey wrenches to be thrown in to the market, technical trading plans should rule the day. But seeing Monday's news-driven meteoric rise, I'm not sure if the upward vibes will continue into Tuesday.

4Cast sees the Cable being "boxed in between ... 1.7495 and 1.7275" for the short-term. They also see the "Next bounce resistance is at 1.7430/55." Despite my hesistation, I'll bite. I'm putting a limit order in to buy at Monday's high of 1.7405, and a take profit at 1.7430. I'll keep the stop loss 20 pips down at 1.7385. I'll check in tomorrow morning and reevaluate.

In somewhat unrelated long term news, on a yearly perspective, the GBP/USD pair is consolidating. It also looks like a descending triangle, perhaps auguring a reversal of the long-term pattern.

Until next time...

This Trade Should Have Worked!

2006-04-03T12:19:00.000-04:00

Remember my last bright idea about buying when the GBP/USD hit support at 1.7269? Well, it worked! Well, it should have worked. After my buy got triggered, the Cable fell to 1.7250 before finally reversing and going my way. Unfortunately, I got stopped out at 1.7250.

"That's not possible!", you say. "Your stop loss was at 1.7249!"

My point precisely. Is OANDA cheating me by triggering my stop 0.0001 before I told it to? Is this some sort of nefarious plot? Are the Forex stars aligning to my detriment?

I'm not sure. I intend to post a question on the OANDA forums to see if anyone else has had this problem.

Anyway, after my stop loss was triggered, the cable went berserk after lower than expected US ISM data at 10 AM EST. I could have picked up 20 pips and then some. So crumbles the Forex cookie. I'll be back for more.

Score (in pips):
After 1 Trade:
Market 20, Young Pip 0

Probably Not A Good Idea

2006-04-02T23:27:00.000-04:00

Don't try this at home, kids.

Well, if it goes wrong, at least its not REAL money!

I'm not sure if this qualifies as a trading opportunity, but I'm doing it anyway.

The only currency pair I currently mess with is the GBP/USD. I hear that its best to focus on one pair, become one with it, learn its intricacies, its idiosyncracies, blah blah blah.

So anyway, I'm looking at the 1-2 day outlook for the cable. Its looking to continue to range, but tend to slip lower than its current 1.7325. I see support at the 1.7269 level, which also happens to coincide with S3 based on March 31 pivot point data. So, I'm putting a limit order to buy the cable at 1.7269. Profit target is 20 pips (1.7289), stop loss is -20 pips (1.7249). Wish me luck, boys and girls!

Welcome to the Pip

2006-03-29T21:44:00.000-05:00

For the uninitiated, foreign currency exchange (Forex) trading is basically the buying and selling of various forms of currency. When you buy a currency, you are hoping that the value of the currency appreciates so that you can later sell it at a higher price, and pocket the difference. When you sell the currency, you are hoping that the value will depreciate, so that you can buy it back at a lower price. This is not unlike the stock market. This website has a great introduction/tutorial to what Forex is.

I first became interested in this market about 2 years ago, and after a bit of learning on a demo account (sort of like a trial run without any money), I tried the real thing. $250 later I had a real account, and using 20:1 margin (margin is basically a multiplier that allowed my $250 to behave like $5000) I managed a 16% return in 2 weeks. And that was the beginning of the end.

2 weeks after my brush with beginner's luck, I began to have losing trades more and more frequently. I chased bad trades with more bad trades, like an alcoholic with amnesia, not remembering that if one hasty trade ended badly, the next hasty trade probably will, too.

Soon, 50% of my money was gone. I withdrew what was left, and walked away scratching my head. Whew, good thing that wasn't grocery money. So now, realizing that I was gambling more than anything else, I want to truly learn how to trade Forex so I can get my money back. And more.

To that end, I've decided a blog can only help me as I record reasons for trades (on another demo account of course), do chart analysis, and just generally ponder all things Forex.

You, dear reader, will be privy to all these thoughts.

So, as I embark on a journey to navigate the rough seas of Forex trading, let's hope that we learn a lot together, and that we don't end up drowning on the way to our destination, profitability.