Update on USD/CHF Trade

In my post on December 19 I mentioned that I had entered the USD/CHF trade I'd spoken of earlier. I was in at 1.0780 with a 100 pip trailer. I had hoped it would break resistance at 1.1125 and move up to the 1.1350 area, but alas, it fell victim to the resistance at the 1.1125 area and fell back. I was stopped out at 1.1031 for a profit of 251 pips. Not bad.

I'm watching the USD/JPY pair right now. It's been trading in a 100 pip range for about 10 days. I look for it to move down (strengthening the yen against the dollar) but will also buy it if it moves upward out of the channel. A good trader yields to the price action and does not put too much stock in what he or she thinks the currency should do. It will be what it will be. The question is, can we overcome our preconceived notions and jump on when it starts to move?

Happy New Year, and Happy Trading!

The 100 Pip Mystery

On December 23, 2008, at approximately 3:20 p.m. EST, the NZD/USD pair had a spike in price. It does not seem to matter what platform you trade on, the spike was real. The issue is how much the price spiked and why different platforms show a different price. I trade primarily on two platforms. Since I began trading the Forex I have had an account at FXCM. By all accounts it has been a good relationship. I've felt that my trades were executed fairly (within reason) and I as I don't trade the news (a sore spot with many different traders across many different platforms) I have not run afoul of the huge spreads and illiquidity that many have complained of. But on December 23 something odd happened that I would like to explore by examining just two platforms, FXCM and MetaTrader.

At the appointed moment (3:20 p.m. EST, 2020 GMT) the high and low of the one minute bar on FXCM was High=0.5805 and the Low=0.5659 for a range of 146 pips. On MetaTrader at the same time the High=0.5712 and the Low=0.5664 for a range of 48 pips. Now what could account for the nearly 100 pip difference between these two platforms? More particularly why did FXCM trade 100 pips higher at that moment? The tick chart shows the spike happened at 3:30:51. There appeared to be significant activity within that one minute time frame on FXCM as the price pushed higher until it took out the 5805 price level (interestingly 5 pips higher than the round number of 5800).

These are just facts, not reasons or explanations. However, if I had been short the NZD/USD and had a stop 140 pips above the current price and a few pips above a round number of 5800, I would have been shocked and angered to see my stop hit on FXCM when if I'd had my trade on the MetaTrader platform I'd have still had a 100 pip cushion. Hopefully, those that were short the pair exited when it first hit the resistance line at around 5660 or they have lost about 100 pips since that point as the pair has moved nicely up the trend line (as a side note, I expect the pair to break south at some point and pierce the trend line and fall, perhaps as far as 5250).

I can't tell you what happened. Only FXCM knows for sure. In one of the books I've got listed to the left "Beat the Forex Dealer", the author Agustin Silvani has some theories about how and why this type of thing happens. My notion is that someone at FXCM saw the stops at 5800+ and wanted to take them out. I'd like to hear their explanation.

Happy Trading and Happy Holidays!

Trend Trading

If you've visited this blog before you've seen the carousel of books to the left of the screen. Two of those books talk about the Turtle Traders, traders who were taught a trend following system by a couple of the most successful commodities futures traders around at the time. I remember when the Turtle Traders were a big topic of speculation in the world of trading, but it wasn't until Curtis Faith's book came out that real, broad based interest began in what trend following could do. The concept of trend following is a simple one. You follow the price of a certain commodity, future, stock, option or currency, and when it exceeds its high or low of so many days, you enter. Your exit strategy is a bit trickier (as it always is) and most trend following systems with some type of move the other way such as reaching the high of a shorter period of time than you used to enter, or a move of a certain percentage of the width of the band between the high and low of a certain period, or the move in the opposite direction of some multiple of the Average True Range. Regardless of what exit you choose, the basic idea is you hop on the trend when it begins, get off a bit after it ends, and take your profit from the middle of the move.

As you might imagine, deciding when the trend begins is the first hurdle. As more traders have taken to trend following systems, it seems as if the length of time one has to wait until entry increases. When the Turtles began their trading the length of time for the look back on highs and lows for entry was 20 days (or so the story is told). The length of time I hear a lot now is 40 days. My system uses a 32 day look back for entry and 20 days for exits. I use a bit of an offset for both entry and exit so I get in a bit earlier and out a bit later. My trading system has returned $577,452 on a starting balance of $100,000 this year. Now this is a much larger return than I've ever had before. I had a 17% loss last year and a whopping 65% loss the year before, so while the gain this year is huge, it must be viewed in light of the stomach churning losses of the previous two years.

The five year average return on the account would have been 52%/yr, but I recharge the account up to $100k at the end of each year if I have a losing year, and take out enough to bring the account down to $100k if I have a winning year. The ten year return would have been 132%/yr. Both calculations are before taxes. I point this out only to illustrate that trend following works, but that you have to reconcile yourself to some nail biting years. Big money cannot be made if you fear losing your account. You must back test your system enough to be able to trust it, then make your trades without emotion. Don't even think about what the return is until year's end. If you are up today, you could still be down on 12/31, so don't get cocky. Conversely, if you are down now, a run up in crude oil could bring you back by years end. That is how trend following works. Big swings, but with a generally upward move in the equity curve.

I would encourage anyone to play with trend trading. It will make you money if you can handle the moves.

Happy Trading!

USD/CHF Trade Idea

Last post I talked about the USD/CHF pair looking like it could move up with an ultimate profit target of has high as 1.22. I opened my trade at 1.0780 yesterday about noon. I am looking for it to push through some resistance at about the 1.1125 level and move up to the neighborhood of 1.1350 before trying to consolidate. I've got a trailer on of about 100 pips so I am in for at least 250 pips of profit and potentially a lot more if things go right. I'll keep my fingers crossed.

I'm also looking for a comeback for the EUR/GBP. The EuroPound pair has had a nice run lately up better than 1800 pips since October 19. It has been retracing for the last day or so and looks to push back up as the Euro strengthens in the international marketplace and the Pound weakens. Its trading at about 0.9325 now. I look for the first profit target at about 0.9425 with an ultimate target of 0.9600. I'll keep you posted if the trade opens (if it moves up through my resistance line and closes above it on the hour chart).

Happy Trading!

EUR/USD Trade Result and New Trade Idea

It seems that, although my inclination of a lower Euro is alive and well, the market has other ideas. Luckily (well, not really luck) I'm ready to go either way with a channel breakout trade like I've been following in my last few posts. The EUR/USD broke upward out of the channel last night about midnight and, after a bit of consolidation, resumed its upward movement just after the open of the London session. All in all, about 300 pips. Not bad, considering it moved in the opposite way I thougt it would.

Another trade I'm watching is the USD/CHF. Its been trading in a downward direction from 18 month highs for the last week or so. I've drawn a trendline following the tops of its hourly trading range and would expect it to break upward at some point to retrace some of what it has lost. I'd look for it to go as high as 1.2050 and then if it continues to show strength on to perhaps 1.2200 (my profit target).

Happy Trading!

Day Trading at Work

If you are a professional and also a trader you know how tough it can be to try to work and trade at the same time. I have yet to figure out the perfect system, but I have worked it out so that, at least during the end of the London session and the beginning of the NY session and not miss out on too much. The problem with trading the Forex is that its a 24 hour market and there are three main cycles the Asian session starting about 7 or 8 pm EST (including Australia, New Zealand, Japan, China, and Hong Kong), the London session starting about 2 or 3 am EST (Great Britain, Germany, Switzerland), and the New York session (U.S., Canada, Mexico, South American countries). Generally, after noon or so, the markets quiet down until the Asian session, so one could watch the markets from 7 pm through until noon the next day. Of course, that is not reasonable. If you are going to work and trade, you have to set some limits.

I start by getting up at 5 am. This allows me to see what has been happening in the early hours of the London session and set up trades for the New York open or monitor trades which opened overnight. I spend 2 hours getting my charts in order and monitoring trades then I go to work. If I am in the office, I open my trading platform and note where my trade positions and orders are. I never set up a trade that I have to watch in real time while at work. I've tried that before and as soon as I set up such a trade, things would go haywire at work and my concentration would be scattered. No. Only trades with wide stops that I can check occasionally to make sure things are working as planned or to close them out if they are not. I try to check the charts at least every half an hour or so just to make sure I'm on track. Once you are used to the system, a quick glance is all it takes to see where you are.

I try to get home between 6 and 7 pm. I like to spend a little time with my daughter (she's 5) before she goes to bed. Once she's tucked in I'll check the Asian session start and see if I need to do anything or how the session start is affecting my trades. All in all I spend about 3 hours a day on trading Forex. This leaves the bulk of my time to practice law (which I enjoy and would not want to give up). I hope this helps you see that trading and professional advancement need not be mutually exclusive.

Happy Trading!

Trading Ideas

In the "you never know how things are going to run" column, last Friday (12/05/08) I posted a trade idea based on a converging triangle pattern in the EUR/USD and stated that I would take the trade whichever way it broke, but that I thought it would break downwards. It did breakout, but up, not down. Its one of those times I don't mind being wrong as it turned me just about 100 pips. The pair broke out on the 8th at the end of the 2 pm bar (I was trading on the hour time frame), dipped back down the rose out of the triangle and hit my trailing stop at 93 pips up. It's moved down a bit off its high and I've adjusted the upper border of the triangle (still converging). I still suspect that the pair will move down at some point and break the trading range, still, I'll take the trade either way.

Another breakout idea, the EUR/CHF has been trading in about a 100 pip range for almost a week. I'd look for a breakout above 1.5650 or below 1.5535. Buy or sell as appropriate. I use the traditional method for placing stops and put them 10 pips or so above or below the most recent high or low prior to the breakout. I move to break even when I've got 25 pips, then put a trailing stop on (usually a 10 pip trailer, more if I'm trading a really volatile pair). I'll report on the trade when I've got more information.

Price Theory

If you've read this blog before, then you know that I am a lawyer by profession, and a trader by avocation. As a lawyer, I've had countless opportunities to see juries in action. You might wonder what juries have to do with trading. Stay with me and I'll explain. Time and time again I've seen a group of 6 or 12 average men and women listen to evidence in a trial, sometimes extremely complex, sometimes simple, and come to the right conclusion. Now its not perfect and I'm sure we can all come up with a few times when the jury system was compromised, but all in all, juries work. The group mind appears to be very capable to sifting through vast amounts of complex information and testimony, throwing out the things that really don't matter, and coming to correct conclusions. It really is fascinating.

Markets run in a very similar way. You have millions of trades every day and each trade is a vote on whether the stock, bond, commodity or currency traded is worth more or less than it was just moments ago. In a very real way, the market is a jury deciding the guilt or innocence (read strength or weakness) in whatever is being traded. This means that the price of any liquid currency or stock is always exactly what it should be (the crux of the Efficient Market Hypothesis) and is perfect based on available information. What makes markets move then? That is a question which could (and probably has) given rise to a vast amount of academic research. My simplistic thought is that markets are living things. There is a constant in-flow of new information that the market reacts to. These reactions are, in very general an simple terms, what move the market.

Why is this important? For many reasons, but what got me thinking about it is that I've started working with MetaTrader4 and am playing with the hundreds of indicators which have been created for it. With very few exceptions, these indicators are simply processed indications of past and present price movements. It seems funny to me that we use processed price to try to divine future prices. I guess I'm more of a purist when it comes to indicators. If price is what we are going to use to try to guess what the prices in the future might be, then any permutation that takes away from the purity of price itself, has to be less helpful. Price tells us all we need to know. Are prices trending? Look at daily and weekly charts. If you can't see a trend, there is not one. Will prices break up or down? Look at how prices have trended, draw support and resistance lines, and wait and see. Indicators like Moving Averages, RSI and MACD only tell you what price has done, not what it will do. They have uses, but truly only in telling us where current price stands compared to historical price. To think otherwise is merely buying in to what brokers, system sellers and others who are only interested in what they can get you to buy, are trying to get you to do.

Want to be different? Want to do better than you've been doing trading with inferior or old information? Here's the secret: Think for yourself. Use price and think for yourself. It really is as simple as that.

Until next time - Happy Trading.

NFP Day

Today is Non-Farm Payroll day. That means that the U.S. Government will release information telling us whether, and how many, jobs were lost or created in November, 2008. Traditionally, this means a pretty big move in the Forex around the time of the announcement (8:30 EST, 13:30 GMT). I've tried all sorts of ideas on how to trade "news" like the NFP, but the bottom line has been that, as a retail Forex trader, I just don't have the access to get into a trade fast enough to beat the big spreads or get fills good enough to really make any money trading news. So, for the most part, I sit it out. I'll see what the market does then look for trades after 9 am or so. It is much safer.

One of the trade set-ups I see developing is a converging triangle formation on the EUR/USD. It is very clear on the weekly chart and pretty clear on the daily. The triangle looks to converge around January 8, 2009, so a trade is likely to take place before that. I will buy or sell depending on whether the pair breaks up or down. My guess is that it will break down and I will look for support at about the 1.1650 level.

Good Trading!

Time and Time Again

The best laid plans . . . To those who are trying to follow this blog, I apologize. I had a personal tragedy in my family which, as the resident attorney, has taken up much of my time. I hope to be more involved in this blog going forward and share with you my thoughts in this down market on how to stay in the game and where I'm putting my money and why.

For the moment, suffice it to say that I am a confirmed Buffetite when it comes to his old saw "Be greedy when others are fearful, and fearful when others are greedy." I'm exercising my greed at the moment and putting some serious $$ in the market. My overall strategy is buy industry groups which will survive this recession (yes, I used the "R" word). Right now that means severely depressed financials, some regional banks like HBAN and BBT and some national powers like BAC and JPM, pharmas like PFE, and some more speculative plays like AOB.

I'm also continuing to work the Forex markets. I'm looking for the USD to continue to strengthen as our economy bottoms, but more than that general feeling, I'm looking at support and resistance for my daily trades.

My next post will be on my support and resistance strategy, which is pretty basic and has worked fairly consistently through the years. I call it my 5 pip strategy, meaning that using 10 to 1 leverage, 5 pips a day ($50 on a $10,000 account) works out to a ridiculous amount of money over the course of a year. Do the math. For those who trade the Forex, do you think 5 pips a day is too much? I'll bet you don't.

See you in a day or two.

And Still I Live

Wow. It's hard to believe that its been a month since I last posted. I apologize to the tens of you who read this :-) I returned from the conference in Florida to a family emergency that has consumed my time for the last month, but which has now, more or less, resolved. Trading has been sparse, though the naked puts I sold in May have gone way bad, then recovered somewhat. Those with July expirations came back enough for me to get out of them with little damage, and I have held on to a few I believe will be good to hold for a while (NUAN and SMSI are two of those). I've been working with a partner on a new Forex trading plan and it is looking promising. I find myself in the age old situation of not having enough time, but having money to invest. My partner is younger than me and has more time than money, so we are a good fit. He is also scary smart. We'll see how that goes. For now, I'm paying attention to the stock market and watching the financials. One of my portfolios is a covered call portfolio with only high yielding stocks. It is doing well, so on balance, the down market has not hit me too hard.

I read a very interesting book while out west on family business. I'll report on it next time I post. It deals with the author's belief that the U.S. economy is collapsing and what we should do to protect ourselves. More next time.

I Have Returned

The wife and I just returned from a conference in Orlando. I will resume posting soon. I closed all of my Forex trades before leaving because I didn't want to have to watch the market and missed a pretty decent move in the direction of my trade (sigh). I did manage my option trading fairly well, although most of the naked puts I've sold in the last month are moving in the wrong direction. One must trust the research and believe in the system (though some sweating will no doubt be in order). Anyway, I will move forward either tomorrow or Monday.

The Luxury of Purpose

One of the interesting, and unexpected things about having more money than you thought you would ever have is that you find that you have the luxury of trying to figure out what you really want to be. That might sound strange, but think about it. When you are working your assets off to improve your position, when your every waking thought is how to move forward, when you spend all of your energy to rise through the next barrier, and suddenly that level of effort is no longer required. What do you do then? Its a problem that I'm sure everyone would like to have (thus the term "luxury"). But its a problem that is not so easily solved. Everyone has heard of lottery winners who go off the deep end and become the type of person no one would have believed before they won. Its a real issue.

The issue for me is what to do with the rest of my life. I have created a trading system through which I can enjoy a very nice standard of living without working. However, I enjoy my job and am not ready to give it up, which is lucrative and adds depth to my resource pool. I use those funds to continue to increase my trading business, which, in turn, increases my income. I don't need more money, yet I pursue it. Why and for what? Is the pursuit of an ever increasing bank account an end unto itself? Or is there more, a reason to continue to grow my funds, a purpose, if you will, for the existence of the venture? I have puzzled over this for quite a while and I have no concrete answers. I think, in my case, I failed to see that this point would come and I was not prepared for it. Had I begun the search for purpose before I needed to, when the struggle was the purpose, then I might be doing something more meaningful than merely creating more wealth for myself and my family.

The search for purpose is a luxury affordable only to those who have satisfied the basic needs of themselves and those for whom they care. One cannot spend time and energy looking for fulfillment when food must be found and shelter is in question. Purpose at its most basic is finding the necessities of life. Only when one is secure from that need can he look for some deeper meaning. I will continue to try and puzzle this out. I hope to find the thing to devote myself to that will give me the satisfaction of a kind that has, up until now, eluded me. I advise you to start the soul searching early in your life, or if it is too late to start early, then don't put it off any longer. Know what you will do when you can do anything. You will be the better for it.

Good Trading!

The Pluses and Minuses of Wide Stops

If you've been reading this blog for the short time it has been up then you know that my trading is limited to mid to long term trades which don't require a lot of monitoring. This means that my trading systems use stops, both trailing and stop loss orders, and occasionally, limit orders. I've found that this type of trading really necessitates the use of wide stops. By wide stops I mean a larger stop than you would use if you were watching the market in real time. I generally place my orders before 7 a.m. or after 8 p.m. so there is not a lot of volatility when I'm looking at the charts. The use of wide stops allows the market to move back and forth without my constant watching. The danger, of course, is that when your stop is hit, you lose more than you would have if you'd used at tighter stop. I'm not saying that my way is for everyone, but I like to have a bit of room for my trade to move. Who has not felt the frustration of placing a trade which was moving in your direction, only to have it stop as soon as you hit the order button and go the other way. With a tight stop, such a common phenomenon would take you out (sometimes only to see the trade reverse it self and move in the direction you thought it would). The wide stop minimizes the whipsaw effect. I usually use a 2 ATR (14 day average) stop from my entry point. It takes a huge move in the wrong direction to hit the stop and leaves plenty of time for little moves against you to right themselves.

Now, the bad news. A few losing trades in a row can have a serious impact on your account. I've lost 300 pips in 3 or 4 trades before seeing a winner on more than one occasion. If your head can't take that, or if your account can't take it, then this style is not for you.

Good Trading!

The Mistake that Could Have Cost a Fortune

Everyone makes mistakes. I’m not one of those lawyers who trumpets perfection, then blames everyone else when it doesn’t happen. I’m comfortable with allowing people to do their own thing, make their own mistakes and learn from them. I only really get angry when people refuse to learn hard won lessons, which is why I’m a bit peeved at myself today.

As I’ve indicated before on this blog, I usually work on my trading in the morning, and again in the evening (as I can) after the family goes to bed. Well, I saw a pattern developing with the EUR/USD pair and decided that buying if the pair rose a bit, would be a good move. I placed my order and went to bed. When I arose in the morning and fired up my computer to see what, if any trades were initiated during my slumber, I found, to my horror, that I had neglected to place a stop on the EUR/USD order. I can’t explain it, I’ve never done it before, but sure enough, there it was. Of course the trade had gone against me and I was down 90 pips. I examined my trade log, saw that I had, indeed, meant to place a stop and where I meant to place it, and put it where it would have been, which was about 15 pips from the then current price. As soon as the stop was in place, the price reversed itself and ended up going back up and hitting my profit target of 50 pips (I place wide stops and will explain why in the next post).

I’d like to say it was a “no harm, no foul” sort of thing, but now each time I place an entry order I am fanatical about making sure the stop is set, so apparently there was some harm done. The market chastised me, and I believe that I’ve learned my lesson. Only time will tell.

Good Trading!

The Importance of Redundant Systems

You never expect to lose power, have your hard drive crash, have your DSL service interrupted or any other technical glitch. All of us have experienced something like that before and its usually nothing more than an annoyance. In trading, however, such an event can be deadly. Scenario: You are trading S&P Index Futures and are watching as your position is inching toward where you are going to exit (for a profit or loss, it does not matter), when suddenly the power goes out. Fortunately you have a laptop ready and fire it up on battery power, but your cable modem needs power to run. What are you going to do now? If only you'd written down your broker's 800 number you could call and, even thought the commission is higher, use a broker assist to exit your position, but you never got around to it. You, my friend, are screwed.

Here is my promise to you. If you trade long enough, this type of thing will happen to you. Here is your recipe to save yourself, and your account. First, write down the broker assist numbers for all of your accounts and have them near where you trade. Second, always have a second computer available (preferably a laptop) which can access the internet by telephone line or wireless (cell phone) modem if need be. Third, (related to the second) have your high speed internet access backed up by either another high speed avenue, a dial-up line, or cell-phone access. In fact, have more than one back up. The last thing you need is for two power related access points to go down and have no back-up of last resort.

This type of planning is essential. Think of it as account insurance. It is the cost of doing business, and we are all about staying in the game.

Good Trading!

Why Sticking to your Trading Plan is Important

Ok, I'm not perfect. I've never claimed to be (except perhaps when drunk), and recent events have proved the fact of my imperfection. Now I've been trading for years, and after the usual newbie issues one has when learning to trade (like overtrading, trading too big, not monitoring trades enough, etc.) things have gone pretty smoothly. I've been consistently profitable for the last 12 years. Ever increasingly so, in fact. But sometimes, I still fall into the rookie mistake trap. Last week it happened in the Forex market. While doing my usual chart reviews early in the morning one day last week, I saw the AUD/USD pair looking like it was, right at that very moment, where I wanted it to be in order to get into a trade. Instead of thinking it over and looking at different time frames, I made a market order and went long 10 lots. Fortunately, I had not completely lost my mind and set a stop. I went to the bathroom, took a shower, came back, and had been stopped out at a 50 pip loss.

What is the lesson here? Its plan your trade and trade your plan. Other trades I made last week, where I did my homework and didn't just look at the chart and think "my that's pretty", went as expected (mostly). But this one burned my fingers. Lesson learned? Perhaps. Historically, I do this occasionally. I'd like to say otherwise, but its the truth. Thank God for stops. Learn from my experience: Don't rush into a trade without examining it from all angles. That is your edge and what sets you apart from the mass of losing traders out there.

Good Trading!

The Problem with Rules One and Two

Everyone who has done any reading on trading or investing has heard Buffett's Rules One and Two:

Rule Number One - Don't Lose Money;
Rule Number Two - See Rule Number One.

(these rules are most often attributed to Bufffett, but I've no idea whether he coined them or not). While the idea that one should not lose money when investing is a good notion, it is very impractical, impossible even. The very existence of the market implies risk. From the farmer who borrows money from the bank to buy a tractor so he can increase his acreage in production to the speculator who is betting that the dollar is going to fall against the yen (two ends of the investing/trading spectrum), risk is playing its part. The "Don't Lose Money" prohibition is a good guideline, but like all guidelines, it comes with a wide margin of error. You will never make any money if you are not willing to incur at least a small risk. Even putting money in a low yield savings account has risk (opportunity costs, inflation, bank insolvency). And you will never make serious money without being willing to take on the risk that leverage imposes. Suffice it to say that risk is our enemy, but in order to win, we must seek it out, and master it.

The issue becomes then, how best to manage risk? Volumes have been written on the subject of money management, and most of what has been written by successful investors and traders (Buffett, Booker, Ponsi, Elder) is useful. The bottom line is, however, that you've got to find your own comfort level when it comes to risk. You've got to be willing to embrace it, but how much will depend on your risk tolerance. Your analysis of how much risk you can and should accept will be a function of your financial position, your trading goals and your psychological make up. It is a question that only you can answer. Most broker sites (at least stock/options broker sites) will have some tool to help you decide what your risk tolerance is, but don't rely too much on what those results are. The answer is inside you and you know, or should know, what it is. It is important to find out what your acceptable level of risk is, because if you trade outside of it you will lose. Too much risk engenders fear and fearful you makes bad decisions. So find out what your level of risk should be, stay with it and periodically revisit the issue to see if the parameters have changed. Remember, no risk, no reward. Too much risk, busted account.

Good Trading!

Forex Thoughts

This is likely to be a volatile week in the currency markets as a basket full of reports which tend to move the market are coming out, not the least of which is the FOMC's Tuesday/Wednesday meeting. The smart money is on a Fed Rate cut of 25 basis points (but such a cut is by no means a certainty). I've been watching three currency pairs for the last several days and it seems like there is a good bit of waiting going on in the market. The USD/CAD pair has been trading in a 2 cent range for the better part of a month now and will eventually break out. Which way? I've got no idea, but a buy order at the top of the range and a sell order at the bottom seems like it might be a good idea. Markets move and it would be unusual for this market to stay range bound for too much longer.

The other break out play is the USD/CHF. Since its run up on the 23rd, its been trading in a tight range. The same type of buy at the high end and sell at the low end might be appropriate.

My third thought is on the EUR/USD. The Euro has been doing very well against the dollar for the last, well long time. It has fallen off just a bit in the last week as it bounced off of the resistance at 1.60. If the Fed lowers interest rates again, it could push this pair back toward its resistance level. Might be an opportunity to make a few pips if the Fed does lower rates.

Just my few scattered musings on the Forex market. Let us see how it plays out.

Good Trading!

What to Trade?

I was having a conversation with a colleague interested in trading today and he posed me a question which I’m asked fairly often. In answer to the question “what should I trade?” I often find myself responding that it just does not matter. Since the advent of electronic trading the opportunities in the markets are tremendous. One can trade stocks, bonds, mutual funds, ETFs, stock futures, commodities futures, index futures, options on stock, commodities futures, or ETFs, currencies, options on currencies, or any other of a thousand tradeable derivatives. But the truth of the matter is that it doesn’t matter what you trade. What matters is that you manage your trade correctly, that you limit your risk, that you know when you will exit (which is so much more important than knowing when you’ll enter), that you don’t overtrade, and that you understand what the thing is that you are trading (meaning don’t trade currency swaps if you don’t understand what makes them move). Markets are markets and the people who are trading these markets (whatever markets they are) have the same hopes and fears that are reflected in every chart of every market throughout the history of recorded trading. A price chart for historic milk prices will look a lot like pork bellies, which will look a lot like IBM, which will look a lot like the EUR/USD. If you understand what motivates people, if you understand the psychology of trading, you can trade any market successfully.

It does not matter what you trade. What matters is that you trade intelligently.

Good Trading!

The Lawyers are the Problem

Here is my gripe of the day. I decided to open up a new trading account with Interactive Brokers (my gripe is not about them - the concept of the Universal Account is fabulous). During the process I had to fill out 15 forms and read and accept 13 disclosures (other than those within the forms which account for another 8 disclosures). In total, 15 forms electronically signed, and 21 disclosures accepted. Now, I'm not complaining about the forms. Your broker needs the information in order to correctly track, organize and administer your account, and that's not something you want them to mess up. Rather, my gripe is with the disclosure forms. I mean, does anyone actually read all of that legaleze? Ok, I did, and it took me 3 hours to get through it all. Most of the information in these disclosure forms is redundant. You make many of the same promises in the Data Feed Disclosure as you do in the Risk of Trading or the Risk of Leverage or the System Failure Disclosure. I suggest that the fault lies with the lawyers that represent the various vendors to our brokers as well as the lawyers that represent our brokers. Couldn't we streamline the system to be something along the line of "You agree that unless we do something on purpose, or that is so stupid that no one would reasonably do it, that makes you lose money, you won't sue us?" All I'm asking for is a little common sense. The problem with how we handle legal issues in this country (and I've been a practicing commercial transactions lawyer for 15 years) is that we use patches. Someone drafts a decent agreement or form and it gets used. Down the road a problem crops up that no one foresaw and something is added to the form to cover that. Then we use the form for a slightly different purpose so we add something to cover the different thing. Then someone sues over something the form allegedly does not cover, so we add a provision or twelve to cover that. After a while you've got some monster of an agreement or disclosure that is so cumbersome that no one even remembers what it looked like in its simple and elegant beginning. I can't tell you how many times I've read deal documents that make no sense because lazy attorneys are cutting and pasting information about a new deal into an old deal's documents. And that old deal had the same problem so the issue compounds until one day an unsuspecting trader is opening an account and he has to read and sign 21 disclosure forms. It irks me, can you tell?

Have a good weekend and Good Trading!

BTW - nothing in this post is in anyway to be construed against Interactive Brokers. They are just covering their assets, as they were advised to do by their attorneys (the bastards!).

Trading = Freedom

Why do we trade? I'm sure there are many answers to that question, but it is worth asking. In my opinion (and since this is my blog, mine is the one that counts) is that the only reason to trade is to make money. If you are in it for the thrill of the action, or because you think you should be, or for any other reason other than to make money, then you should stop reading, liquidate your positions, and give some serious consideration to the issue of what trading is all about. Trading is about making money, period. There is no other answer. Making money. That's it.

Trading, when pursued for the right reasons, is freedom. The freedom to do what you want, when you want. The freedom not to have to deal with unpleasant people in order to make a living. The freedom to buy what you need and sometimes what you just want. To go where you want, when you want without anyone holding anything over your head. Trading is Freedom. (But trading is not happiness, and don't fool yourself that it is. That is an issue for an entirely different issue for a different post.)

Why do I trade? Is that a trick question? To make money of course. To pay the mortgage, to buy cars to take trips to pay my daughter's private school tuition. Trading is a business and I do it only to make money. It does interest me and I do enjoy it (so its a bonus for me that it makes money). I have always been interested in the markets. When I was a boy I would pour over the stock market listings in our local paper and follow companies I knew about. General Motors, IBM, 3M (where my father worked) were all companies which had a place in my world. I did not understand the significance of the stock market, but I did understand that shares rose and fell in price and that they represented ownership in the company. I bought my first mutual fund (IDS Income Fund) when I was 12 with some money I had earned from my paper routes and some my parents contributed. That investment was forgotten over the course of about 10 years and when it was rediscovered it had tripled in value. My curiosity was engaged. Curiosity led to reading. Reading led to interest, followed by the temporary diversion of law school. Interest led to study. Study led to my first attempt, which led to losses. Losses led the review and my second attempt, which was mildly profitable. And over the next 10 years or so, a trading style, trading plan, trading business was formed.

Read, learn, practice and when you are ready, trade. Trading to make money = Freedom.

Good Trading!

The Inverse Relationship between Time and Time Frames

When to trade and what time frames to trade are two questions you must answer before you can execute your trading plan. From personal experience I know that if you don’t have a set time you work on your trading then you will not consistently get to it, and consistency is an absolute requirement when it comes to successful trading. You must set your work hours and get your significant other, family and friends to respect that time. If you are like me and use the early mornings before anyone else is up (during the week at least) it is not too much trouble. Weekends are another matter. Whatever the hurdles, you absolutely have to have sacrosanct time to work on your trading business. How much and when will be, in part, determined by what time frames you trade.

When I say “time frame” in relation to trading I mean whether you will be trading from daily charts, weekly, hourly, 15 minutes, by the tick or some other time frame. It is important because each time frame has its own style, its own personality, whatever your trading vehicle is. Trading from the hourly charts is not the same as trading from the weeklies, and the amount of time it takes to trade hourly charts is greater than daily or weekly charts. Hence, you need to devote more time during the trading day to the shorter time frames. This should be intuitive, but you’d be surprised how many people believe that a one minute chart and a monthly chart are fundamentally the same. I grant that, from a distance, they look similar (for a liquid equity, future or currency pair), but they are not the same. And the amount of time you need to devote to your trading will be inversely proportional to your time frame.

So, first, know what time frame you’ll be trading, then plan to spend the time you need to do what needs to be done for trading it. Get buy-in from your family and friends and commit to a specific work schedule. If you’ll do this, you stand a much better chance of success than if you don’t.

Good Trading!

Focus, part II

Focusing on a particular market and particular trading vehicles, be they stocks, futures, options or forex is a good way to start to build trading expertise. But it is only half the picture, or perhaps better put, the picture is only half in focus. One must also limit oneself to the types of situations where trades are initiated. By this I mean, you don’t want to use every available system or indicator to signal trades even on only those markets you are following closely. As important as limiting your markets is limiting your trading signals. Find the systems that work well for your mental frame of mind and learn the ins and outs of those systems. Don’t worry about adding to the number of systems you trade or signals you watch for until you are thoroughly comfortable with what you are using now. For example, when I trade the Forex I restrict myself to six non-correlated currency pairs (a correlated currency pair would be a pair that moves in tandem most of the time like EUR/JPY and GBP/JPY, or inversely like EUR/USD and USD/CHF – its not wise to trade correlated pairs because it basically doubles your position in the same basic trade), and I use only support and resistance lines, trend trading and flags/pennants as my trading signal/indicators. There are literally hundreds of different trading indicators and systems available for every market. Some work, some don’t and some work better than others. But the important thing is to limit yourself to what works for you and master those before adding anything to your bag of tricks.

Good Trading!

Focus

When I first started trading through an online brokerage I went through a phase of "information overload". I was using E*Trade (which I still do for some of my trading) and using Worden's TeleChart for charting (when I moved to commodities I started using MetaStock for charting and backtesting). I had the world of information at my fingertips. There is a danger to being able to examine information on any equity or futures contract traded in the market, you can easily lose focus. Let's face it, we just don't have the capacity to follow every market for every traded stock, option, future, or currency pair.

When I realized that part of the reason I was losing money was that I was trying to do too much, that I was falling into the trap of feeling that there was an opportunity out there somewhere if I just searched hard enough, that I had to be in the market all the time, then, and only then, did I begin to consistently win. So how do we deal with all of this information? We discriminate (in the good way, not the bad). We carefully choose the markets we are going to trade. We start small and slowly increase our capacity. If you are trading equities, start with stocks you already know. Pick no more than ten to follow and follow them in whatever timeframe you are trading until following these ten is no problem. Once you can follow these ten without missing anything then add another interesting stock to your stable. In this way you limit your trades to only those you've actually studied. You develop an understanding of how certain stocks move and you can learn to exploit that understanding. You are not in the market all the time, rather only when you have the best of it.

The same principle applies to currency pairs, futures contracts and options. If you slowly stretch your knowledge and understanding instead of just jumping into the deep end of the pool, you are much more likely to swim than to sink.

Good Trading!

The Difference Between Gambling, Trading and Investing

Anyone who has been in the market long enough, especially if they do any short term trading or, god forbid, trade commodities or futures, know that there is alot of ignorance about trading. Who has not heard that short term trading is akin to gambling? That the only way to make a small fortune in commodities is to start with a big one? All of my life I've heard people, most of whom have either no experience in the markets or one painful losing experience, talk of traders this way. This type of attitude is grounded in ignorance of what the terms Trading, Investing and Gambling actually mean.

Let's define the terms and then discuss what they mean. These are my definitions and I'll differentiate them as necessary from Webster's. First Investing: Investing is the placing of value in an asset in order to derive a benefit from the long term appreciation of the asset. This definition does not differ appreciably from the dictionary definition, but I infer a long-term time frome on it in order to differentiate it from Trading. Investing means putting money into something like a stock or real estate an letting time pass in order to gain long term appreciation (which hopefully out paces inflation). Second Trading: Trading means looking for a short-term advantage in the marketplace. Looking to take advantage of the difference between the current price of an asset and its true value in the hopes that the market comes into line with the asset's value and the trader profits from the price movement. An example of Trading would be selling one currency to buy another in order to take advantage of an interest rate differential or because technical analysis indicates that one currency will move favorably relative to another in the short term. Any use of technical analysis in order to gain short-term advantage in the market is Trading. I use the capital gains time frame to differentiate between trading and investing. If you hold an asset long enough to have its increase taxed as a capial gain, then you've invested. If not, then you've traded. The difference is a bit arbitrary, but there is a border there somewhere that is hard to define. Third Gambling: Gambling is the risk of value upon pure chance. Gambling implies no advantage. If you threw a dart at the Investor's Business Daily's stock tables and put your money on the company you hit, that would be gambling. If you randomly walked through a casino and put money into a slot machine, that would be gambling. But there are betting opportunities that are not gambles. Poker, some video poker, sports betting, horse racing, blackjack, (and some would argue craps with dice control, and roulette with wheel clocking) are all casino based Gambling games where the player can have an advantage. Where you have an advantage, I would argue you are not Gambling. Having the "best of it" is, over time, not risking money on pure chance and hence, by my definition, not Gambling.

The whole point of this post is that putting your money where you have an advantage, whether that is investing (which everone should do), trading (which everyone should learn to do), or playing games with the best of it (which few should attempt, but is fun), is something we should all strive for. Don't gamble with your money. Be smart and have the best of it whatever you do.

Its all about Time

I work five to six days a week, 50 weeks a year. Monday through Friday are generally ten to twelve hours long. Saturday, three to five hours long. Add to this a family with whom I want to spend time and you've got a recipe for disaster when it comes to running a trading business. How to handle the time commitment has been an issue with me for several years (since the birth of my daughter - who is now five). I've found that, for me, trading in a longer term time frame works best because I don't have to monitor it during the work day. What do I mean? Well, with technology today you can trade just about every major market in the world (and some not so major markets) in real time and in time frames as short as a single tick. That sort of trading requires you to be tuned in to the market the entire time you are in it. Trading in time frames shorter than a day is, for me, too attention intensive. I needed to find a methodology which allows me to trade the markets in a way that does not require me to be watching it all the time. Hence, I trade in daily and weekly time frames. This means when I am looking for a trade, I examine the daily and weekly charts (sometimes the four-hour charts to help find entry points). I plan my entries and exits using these time frames and so I don't need to watch the markets until the new daily bar is generated. This minimizes my time spent planning and executing my trades and allows me to maximize my time in other areas of my life.

Of course, this does not mean that I do not spend significant amounts of time looking for opportunities and preparing for the next trade. I estimate that I spend ten to fifteen hours a week on my trading business. Sometimes a bit more, sometimes a bit less. I have found that having regular business hours helps. I know when I am working on my trading business and I can plan accordingly. For me, the first two hours of the morning (usually from 5 am to 7 am) are used for my trading business. On the weekends (especially Sunday as the Australian and Asian Forex markets open on late Sunday afternoon) I let my wife sleep in and I get a couple of hours of planning in.

There is no substitute for time. You've got to put the hours in if you want to be a successful trader. There is no other way. You can (and when you are ready, probably should) spend some time reading what other people believe the markets will do, but you can't rely on others to do your thinking for you. No one cares about your money as much as you do. If you remember that, you'll have a greater chance of getting out of the market with a profit.

Good luck, and good hunting.

Welcome to my Avocation

In time this will be where I discuss what it is like to be a professional in the working world, while trying to practice my avocation - Trading. I will discuss my 15 years of successes and failures in trading stocks, commodities, options and forex. It has been a ride and I look forward to sharing it with you. I look forward to sharing my opinions on time, the markets, capitalization, and more importantly, the money that can be made by a well executed trading plan. Because I do work 12 hours a day, it may take a while to get this up and running to the point I am satisfied with it, but I will endeavor to get it there.

In the mean time, I ask for your patience . . .