A short term trader needs to be consistent

As the stay-at-home brings challenges to many, to us traders, it has made the routine more stable and more rewarding.

Few investment vehicles are profitable right now. Even the longer-term trader will struggle with market volatility.

For the savvy intraday trader, it is steady as she goes.

What, if anything, has changed for the short-term trader?

Other than market size, nothing. What is so very important is not to risk any more on any one trade that a trader would do otherwise.

The average price movement in the forex market is several times larger today to what it was a few months ago.

A time of great opportunity one might think. But actually, it’s not. For us, it is business as usual. The same number of trades (as the market cycle is more significant, but its structure never changes) and the same reward as profit potential balances with risk and probability.

Our edge is being able to read the market context with a high degree of directional probability, ascertain the market value and find reasonable market setups.

After that, it is a matter of an appropriate entry (we can enter both ways in the market—long or short), and we manage that trade until the market value goes to the opposite end of the reason for why we entered in the first place.

And do that consistently day after day.

Big ups and big downs

Many markets, the currency pairings being no exception, have had significant surprise price moves recently—and will probably continue to do so for some time to come.

Have we changed our trading style to deal with these rare times? No, we are driven by the market structure as reflected on a chart.

Over the last week or so many of the currency markets are price changing within what we refer to as trading ranges. Big ups and big downs. How do we deal with that?

We take our trades based on context, value, setup, and price action. In a trading range, we look to sell high, buy low, use an appropriate stop, scale in, trade small and take small profits. (Small being relative to account size).

We’ve added a page showing the chart analysis by James. These are a synopsis of a cycle or a particular trading period. In the charts posted, most of the bars represent one hour within a structure that takes us over several days.

Unless you are familiar with the price action terms, it is unlikely that the detail will make any sense. But for those who can read the terminology, you will gleam the significant edge that we feel we have.

As I have mentioned previously, most competent price action analysts can accurately annotate a chart after the event. Only an exceptional analyst can do so ahead of a live market with a high degree of probability.

Good time for traders—investors not so much.

To an investor having enjoyed one of the best bull markets over the recent years, the markets current vulnerability must be disconcerting.

To a trader, the market is providing excellent opportunities.

But a trader has to be vigilant. The oil price disruption as we viewed the markets early Monday morning of this week necessitated a change.

That change was not a conscious decision, but rather one that followed the market structure.

With unusual price movement (big ups, followed immediately by big downs) we were pleased that we had decided not to be in the market over a weekend. During which time gap bars (where the market opens at a significant difference in price to where it closed) would be prevalent.

The oil price movement and the effect it had on our currency pairings meant we could not find a structure on the hourly charts and above. But the 15 minutes (day trading chart) did.

We provided a 1.3% increase in the fund since Monday. Not bad for a four-day week!

What I mean by structure can be seen below. Although this is a one-hour chart to provide context and include the oil spike, we conducted our actual analysis and trade management on the lower time-frame picture.

It is easy for an analyst to put structure annotations on a chart after the event. My analyst (James) provided these calls and more as, and often slightly before, the market developed. Through technical analysis, James is exceptional at accurately telling the market story ahead of time.

You might think that all the trader then needs to do is trade. I wish it were that easy.

Even with an excellent market analysis, the job of trader (entry, stop and target position, amount to risk and assessment of probability) takes a long time to perfect. Not to mention a perfect understanding of what the analyst is providing topped with an ability to make quick, rational decisions.

How does a day trader get started? Price action and context traders’ course that we recommend has over 100 hours of instructional videos.

Then a fledgeling trader is ready to backtest the lessons for a similar amount of time. After which paper trade in real-time and then trade lightly for as long as it takes to be consistently profitable. Only then does a trader’s account increase.

To graduate as an analyst, however, a more magnificent natural adaptation to the world of price action is needed.

George Soros’ lesson came to mind

To the Slow Trader investors, I thought it an appropriate time to let you know where we are.

As you can see from the chart below, we are up slightly. Rather disappointing as we were in short at the start of probably the most significant market sell-off since 2008.

My problem with this trade, which I think was evident from a previous post, was that I got in way too early. We were out of the money in the German 30 (DAX) for about three months. A concern and one that reduces our trading margin in the meantime.

The drawdown was 19% of the fund. My standard is 0.5%. Therefore, I significantly went outside of my comfort zone.

The drop happened too quickly. What I mean by this is that I was looking for steady price action. Last week’s bar closing below the prior week’s bar. Or, as it turned out the monthly bar (in this instance February) closing with a large tail on top and again below the prior month’s bar.

With any of these things happening in good order then, in all likelihood, I would have held the trade until price action told me to buy back our shorts.

What threw me was the crash that happened, and one that was in our favour. Why an issue? I recall George Soros (the billionaire investor) telling how he lost much of his wealth shorting the start of the 2008 financial crash. The problem, as he said, was the volatility.

I observed as the DAX dropped through our entry point and down. However, as I say it was going too quickly and the likelihood of a significant exhaustion bounce was inevitable.

The issue with a bounce, as any professional trader will agree, is that they often become self-fulfilling—institutions (mainly) taking profits and losses all at the same point.

That point, I judged, would be when the price hit the weekly 100 moving average. There was, a 60% chance of a bounce at this level and if the bounce was sufficient, it could revert the market (maybe a 30% chance) to always in long again.

I exited our three-month trade at this exact point, and thereby in our small way, adding to the bounce effect. The market did indeed immediately reverse climbing for a time back up some 500 points.

That was us out with a small profit for our trouble and no way of getting back in. Nor did I want to, thank you very much. After all, Soros got to be a billionaire, and I think his lesson was worth taking.

28th February 2020

Black box thinking

We’re excited about the subtle but significant changes that we have implemented.

I think all traders, whether they are proprietary, professional or retail, always struggle to find what works for them. And as you know from these posts, we are no different.

Black box thinking, the surprising truth about success’ by Matthew Syed brings home the idea that learning from our failures is paramount to any chance of eventual success.

The book, in part, draws comparisons between aviation and healthcare. Since the ’70s, and formerly a NASA programme, aviation has, in large part, been such a safety success story by learning from its mistakes. Nothing grander than that.

Aviation insists on an open-loop learning model. Flight crew, for example, operate in an atmosphere of mutual support of cross-referred checks, everyone questioned by anyone no matter what their position and an open-loop reporting facility that shares without vindication errors that have or may occur.

What has this got to do with a traded fund?

Even a highly proficient technical trader is guilty of a multitude of errors creeping into the routine of things. The nature of the game is that such mistakes take away from an account over time significantly more than a corresponding success adds.

Therefore, imagine trading in a similar way to the description above. In which we work within a team, each member graduates to a position that best suits their innate talents.

A position that leaves room for movement and innovation but benefits from an agreed plan or strategy, a shared briefing and approach appropriate to the timescale required, loose but agreeable support during trade time and an all-important regular debrief of lessons learnt.

From the observation of news reports and events, market analytical assessment, timely recognition of value and setup to the execution of the trade, the structure and its subsequent management.

We give ourselves the best chance of success by openly confronting each aspect of our trade model and learning frankly from our failures, no matter how small.

When is a trade an investment?

Our post ‘Early on the DAX and JPY‘ still applies. We entered short the German 30 index (DAX) and shorted both the Australian Dollar and the Euro against the Japanese Yen.

It is arguable that a weekly chart is not trading but investing. These trades have been going for so long (several weeks) that they show best on the higher time frame drawings.

If the S&P 500 index takes a drop, then it is probable that the DAX will follow.

The Economist recently reported that Bridgewater (the world’s most significant hedge fund) had taken a $1.5 billion in derivatives short in the S&P 500.

Al Brooks, a technical trader, forecasted at least a 5% drop in price in the index, a decline, he explains, that eventually could be anything up to 20%.

Having said all that, making independent technical assumptions is vital.

The DAX, despite the convictions of those mentioned, is a low probability endeavour. But we continue to hold.

A trader always considers the probability and reward/risk of a trade. A low probability trade often equals a high reward/risk outcome; and a high probability trade a small reward/risk outcome. That is all part of the ‘traders equation’.

The strengthening of the Japanese Yen, on the other hand, is technically, and on a weekly synopsis, a satisfactory probability endeavour.

We continue to trade the remaining fund margin on the lower timeframe, which last anything between a few hours to no more than a few days. In other words, trading not investing.

The trader and the analyst—different mindsets

We are already moving into our third week back since the seasonal break. We took the time to review our trading plan. It isn’t just in the words we have written but, and probably more importantly, in our approach. The ‘how we do it’ is one thing. Our collaborative methodology is another.

Anchor

Last year we anchored our trade readings around the lower time frame chart analysis. In other words, we day traded. Which, of course, means that a trade entered at any point during the trading period would be exited before the end of the day.

This year we have started to move our anchor period to the one-hour charts; this is a wonderfully flexible timeframe. It is a period that is on the apex of being classified as either a lower or higher timeframe. Many deals finalise in the same session, but a trader may have to be comfortable holding for several days.

Any change in price is relative

Okay, holding for several days to an investor or a higher timeframe swing trader makes them think ‘what is the big deal’? The answer comes down to relative price change. An investor may have judged a trade entry based on a weekly chart and maybe placing high reliance on fundamental rather than technical information. Often, several days, weeks or months down the road and to this individual more than likely nothing has changed. Price is similar or an average weekly bar or so higher or lower in value to where she started.

Meanwhile, if we zoom in to the other extreme of our short-term trader, life has been a perpetual whirlwind of activity all within the same period in which our investor friend has seen little difference.

How many markets?

The various trade levels can be called ‘position’, ‘swing’ or ‘active’. But again, this is relative to a timeframe. An ‘active’ or ‘scalp’ approach on a one-hour bar chart would, over a similarly traded price range, be a ‘swing’ by a lower timeframe day trader.

It is generally best that technical traders select an anchor chart period that best suits their strategy, personality and commitment.

As we have moved to the hourly anchor, we have also significantly increased the number of markets we review. Last year on the lower timeframe, we reviewed no more than three currency pairings. With our change in anchor, we are viewing more than 20 pairings.

The analyst and the trader mindset

Such a change presents an analytical challenge. There is a clear demarcation between the roles of an analyst and a trade setter. The former requires clear ‘what if’ conscious brain thinking. The latter is very much a subconscious endeavour. To mix the two asks for doubt and therefore for unwarranted hesitation, which in turn leads to confidence issues and the introduction of the primal instincts of fear and greed.

A consideration with the lower timeframe day traders too, but the good ones teach themselves to stay in the moment (the subconscious) confident in their backtesting (the conscious) preparation and practise. Higher timeframe traders often move their analysis to the weekend.

The hourly anchored trader (30 minutes to 4-hourly also) have, in this regard, a more difficult proposition. On these anchor levels, the market moves too quickly for the benefit from weekend analysis and unlike our true day trading friend over too many demands to not require constant switching from analyst to the trader. In other words, it is a two-person role.

The colour codes help

We have trialled this two-person approach with pleasing results since our return to work. Through our Trading View software, the analyst will categorise a market using the colder colours of blue, purple and then to green to indicate to the trader where we are relative to each chart. Once the analyst nominates a green (usually with a chart explanation via Skype), the trader is clear to trade. The trader will designate orange as an order placed (again, with a transmitted chart but this time from the trader to the analyst) and red when a trade activates.

This approach, simple in concept, has the advantage of maintaining a clear demarcation of roles and therefore, appropriate brain activity. ‘How champions think’ by Dr Bob Rotella explains the concept marvellously.

Early on the DAX and JPY

Trading in the daily timeframe can result in a seemingly overly extended hold.
We took the German 30 (DAX) short some weeks ago anticipating a decrease in price.
We were very early. The index has hovered at its current value since the 7th of November.

At the start of this month, the value dropped (encouragingly for us) but has gradually ascended.
With yesterdays positive employment results in the USA, the S&P 500 recovered well but closed below last months high.
A weakening of the S&P often has a direct correlation in the movement of the DAX.
We are anticipating that this trade may not play out until the New Year.


We were also early on the daily chart with shorts on each of USD/JPY, EUR/JPY and AUD/JPY.
However, last week each of these pairings moved our way encouragingly.

We continue proactively with intraday trades too — these days more routinely with the 30-minute to four-hour charts.
Such charts keep our stops out of much of the daily noise of news events and on average takes several days to complete.

You will recall that the 5-minute chart was our big favourite for some time. A great daytraders instrument, but the results (for me anyway) were not as significant as what we seem to be able to achieve using a 30 minute, one and four hour and daily approach.

For next year we plan to expand into stocks and shares with part of the portfolio and a weekly technical and annual fundamental mix. More of that later.

As the Xmas break rushes towards us, may we wish you all a wonderful time and, for each of us, a prosperous New Year.

A move to TradingView

Our charting software is in the process of moving from ProRealTime to TradingView.

We have also changed our broker.

Such a move sounds simple. But like moving house, it is more time consuming than first imagined.

In the world of currency pairings (or FX markets) there is no central governing body. Instead, each financial institution provides its price feed to the trader. Whether institutional or private.

Bewildering, but in practice, it works.

What is essential to a trader is that the currency pairing price they observe on a chart is identical to that of the broker.

In the FX market prices are quoted to the fourth decimal point, so the decimal points (1/100th of 1%) must match up on the chart and with the broker.

Right, with that out of the way, why have I moved charts?

Previously browser-based charts were a bit clunky. Slow internet feeds and software that was not up to the job. The way around this was to use software downloaded to the computer.

As you can imagine, things have moved on recently in this area. Of all the charts considered we found TradingView to be the best for our needs.

I won’t list all the advantages that we found only to mention what to us is most significant, and that is the backtesting facility that comes with TradingView.

We would have moved for this alone. To us, backtesting provides an edge. “Repetition is the mother of wisdom” David H. Weis

But as an experienced retail trader, why take so long to move software and broker? It took me by surprise too. Researching, transferring, and practising was more involved than I thought. I guess Lewis Hamilton wouldn’t change cars halfway through the season if he could help it.

The change for us is so profound that it also got me to rewrite my personal trading plan, which is in progress on this site.

We will keep you posted over the next few weeks as our full trading comes online again.