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.

The DAX daily chart

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.

EUR/JPY daily chart.

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.

Context price action

Trade opportunities have been in earnest so far in September. Somewhat odd to those trading the higher timeframes such as the daily or weekly scale of things. Where nothing much has occurred, but dig under the surface to the 4 hours, one hour and maybe occasionally the 5 minute and price movement has been identifiable.

A couple of examples from my recent trading log:

AUD/JPY short, entry and exit on the 5-minute chart.

The setup above is a short entry in AUD/JPY using the 5-minute chart. A live screenshot with the left-hand edge of the blue line depicting my entry position. My target is the lower red horizontal line, a goal that is reached later that day.

NZD/USD short, entry and exit on the one hour chart.

The entry and exit on the trade above started on the 12th September and concluded four days later. A double-entry with each short shown by the red arrow at the top of the chart. Exit for both entries was at the green diamond and slightly before my target depicted by the lower red horizontal line. Holding to the goal would have been a good thing to do, but we achieved a trade that provided nearly six times of reward to risk (6R).

Price action and the context of multiple timeframe charts gives me an early insight into the sentiment of the market and, importantly, the probable market flow of the big players. Technically the trade has to make sense and has to be incorporated with a setup that provides me with a clear reward to risk calculation. The deal has to make sense also on a reasonable timeframe above my entry chart, which provides the essential strategic or fundamental agreement (the macro).

When you explain what type of financial trader you are, it will often fit into one of the following broad explanations:

Sentiment
Flow
Technical
Macro

As a context, price action trader who reviews multiple time frames, I consider that in one way or another, I have a preview into all four disciplines.

Here’s a trade that I exited almost on the bell of the weekend market close last night at 20:59.

USD/JPY short, entry and exit on the one hour chart.

The above setup started at the higher horizontal black arrow and concluded successfully at the lower similar mark. Fortunately, the price reached the target as the market was closing for the weekend.

The entry was over two days and as you can see from the picture price took its time to move determinedly lower. When it did, it made the hold all worthwhile.

Below is a sentiment notice that the dollar was likely to weaken. Interesting how context price action identified this sentiment some 24 hours earlier!

Media sentiment regarding USD/PY.

August is more active than usual.

So far, the currency and index markets have been more active than traditionally so in August. 

My anchor or intraday timeframe has moved out to the hourly chart. I still, however, for context, frequently view the 4 hour and daily charts. The weekly also but only to reaffirm a previously drawn crucial weekly support or resistance line, otherwise the weekly chart not so much. 

With the higher timeframe, I’m able to consider many more currency pairings. More than a dozen together with the DAX, S&P 500 and gold. You will know from the news that the indices mentioned have been negatively volatile recently. Unlike your typical investment vehicle, we can benefit equally from the negative or positive price movement of all of these instruments.

Within the currency pairings, the British Pound has spent much of its time in a reasonably tight range against the US Dollar and other pairings. The Japanese Yen, however, has generally trended positively very well against many of the major players. 

We discussed in the last post the importance of measuring specific criteria. Probably the most important of which, together with the per cent amount risked on each trade, is the reward to risk result (R). For example, an exit position that has a 50 pip risk, but a 100 pip reward is a positive 2R trade. 

For a consistent trader, this is also a reasonable indication of market movement. August is littered usually with 1R (or less) trades. However, this week, I’ve taken a few higher trades, one of which at over 5R. 

I look forward to what next week might bring.

Of note, the fund will not be traded from the close of the market on 23rd August until 12th September.  Happy holidays everyone.

What a trader needs to know to improve profitability

What am I working on the most to improve my trading profitability? 

A question, some would think, answered with reference to strategy or method, but it is not that, as significant as it is.

It is regardless of a traders methodology.

What makes a massive difference to profitability is knowing these three inputs: R, win/loss percentage and per cent of account balance risked per trade.

Professional poker players calculate ‘risk of ruin’ (ROR) as a measure of probability, and it applies equally to financial trading.

To calculate our ROR, we need all three inputs, and the smallest of tweaks can make a significant difference.

It applies equally to financial trading.

The measurement of R 

What is R? This refers to reward/risk.

When entering a trade, a professional trader will immediately place a stop loss position coincidental with the trade position.

In the above instance, if our stop is activated, that would be recorded as a -1R trade. (As long as each entry has the same risk amount). If, however, our deal is profitable and we exit at a regular price equal to our stop price position, then we achieve a +1R. On the other hand, if we deliver twice the target distance as compared to the stop position than we would record a +2R, and so on.

Knowledge of the R achieved is essential as a measure towards determining ROR. 

Win/loss percentage.

Win/loss shown as a difference in wins compared to losses shown as a percentage. 

In ‘Market Wizards’ (where Jack Schwager interviews top traders) Schwager gives the ‘wizards’ two choices. A strategy with a high win/loss ratio and a low R, or a small win/loss strategy with a high R. 

I forget the exact wording as it’s a while since I read the book; however, I do recall that all ‘wizards’ took the latter and without hesitation. Most retail traders would probably plump for the former. (If nothing else this indicates the power of R).

Win/loss is better if expressed as a percentage of each strategy traded to provide a complete understanding of the underlying ROR.

How many trades are needed to give a measurable win/loss? There is no exact answer, but my guess would be at least 100 and somewhere between 500 and 1000 measured trades would be better. Of course, these can be a demo or simulated trades; however, ‘live’ trades are always going to be a truer confirmation of a traders skill level. 

Account balance risked per trade.

Getting account balance percentage wrong is probably why most traders burn their accounts at some point (often early) in their trading careers. I was no different. 

In almost all books or trading courses, the explanation of ‘per cent of account balance risked per trade’ is weak. Thus leaving it open to individuals own interpretation resulting not infrequently to a ruinous outcome.

Yes, trading courses point out the need to trade as a percentage of the account. Maybe one or two per cent is provided as a loose example. In reality, it is much more exact than this.

Without having each of these measures of R, win/loss and per cent of account balance risked per trade, it is not possible to calculate the all-important ROR.

Only when we have all three accurately available can we know what we need to tweak to improve our profitability.  

Fund update

The list below shows how we are doing so far and a simple explanation of what we’re doing to improve things further.

Slowtrader fund as of 5/7/2019

Trading the lower timeframe intraday charts have been a necessary route for us. It has provided lots of chart time and many trade opportunities on an almost daily basis.

However, it is time now to increase the fund at a higher rate by taking the significant lessons learnt from day trading and move to the higher inter-day chart levels. (Rather than trades being open for a few minutes to a few hours, with the necessary stops and targets that represent that timeframe, we will be trading wider, and therefore a trade could be open from an hour up to a few days).

Most traders cannot trade lower timeframe charts successfully. Very few that I can see make it into a highly profitable enterprise. Why is this?

There are several reasons. The obvious is that with such charts a trader is more vulnerable to short term, and occasionally unexpected, news releases.

Secondly, markets spread can have an inordinate effect on a traders account when trading in the lower dimension.

Thirdly, and a reason that is not immediately obvious to most day traders is that the size of individual bars relative to spread invalidates many opportunities to use measured move targets.

As a discretionary swing trader, that final reason is more significant than I could have invisioned.

To try to illustrate the point the following is an excerpt from a trade taken yesterday and published as it occurs on Skype.

“The 4 hr and even the 1 hr allow measured move trades of a single bar.

GBP/USD hourly chart 5/7/2019, first measurement.

A live example (not crucial if you like the price action or not at this stage).
Using the ruler or the fib tool, we have a potential stop and target.

GBP/USD hourly chart 5/7/2019, second measurement.

However, if we copy the fib and move it up to match an improved stop position, we get our revised entry point. The stop in this example is just slightly above the high of the relevant range; this works even better on the 4 hr, but I have the 1 hr as a template too.

I would trade the 1 hr on the same markets as the 5 min. I am expanding the possible range of markets only on the 4 hr.

There are many ways to approach the measured move; this is simply how I went about trading this one.

To complete this train of thought. On the 4 hr and often the 1 hr a measured move can be a single bar or multiple bars. It can be a measure of the wick to wick, wick to close or close to close. With enough practise the best solution becomes apparent with a reasonable degree of confidence.

Of course, a measured move relies on the set-up.”

Target reached (a £440 trade in this instance)

Target reached for a 1.3R. (R means reward/risk, and in this case, the target was 1.3 times the stop position)

Trading principles, are they important?

In the previous three posts, I talked about distinct characteristics (principles) that may be necessary to help make us consistently profitable in technical, financial trading.

A process or a way that we can apply to any methodology, within reason. So, am I saying that the method or system by which we trade is secondary to some overarching principles? Yes, I am. The most significant of them being the trader’s psychology for which I’d highly recommend ‘Trading in the zone by Mark Douglas’.

I have chosen discipline, quantitative and discretionary as my trading hooks, my principles (and combined them with trading psychology). In other words, they are the platform to which I link my trading system.

Is a trading system not as important? When we start, we all look for a method first and are ignorant of the more critical needs of principles. I guess it would be like an athlete working tirelessly on technique but ignoring fitness.

Once I have my underlying principles sorted (my fitness), I can then more easily add systems as I need (technique).

More importantly, trading principles force us to be more selective about our system. The strict criteria of trading laws act as a standard for system selection and amendment; this is the same if we traded in price action, intraday currency pairings or was a gap trader of a daily equity chart.

P.S. For next month I’d like to discuss something that I’m working on at the moment, the need to combine both intuitive and systematic.

Instinctive is how most traders start and how we lose our money, often all of it! We learn that lesson and try again, but this time with a systematic approach, and if we do this well, we might not lose as much.

As a discretionary trader (i.e. not simply a systems trader) what I believe is necessary to tip the balance and propel us into creating a real trading account is a finely tuned and disciplined balance of both aspects. How to go about achieving this is something we’ll explore.

Quantitative t​​rad​er​

If we now know what a disciplined and a discretionary trader looks like why add quantitatively? If discipline is our safety net and discretionary is our process, then quantitativeness is our foundation. It is the confidence on which we base our trades.

In word order, I try to be a disciplined, quantitative, discretionary trader. Quantitatively in this instance, refers to trades based on a defined strategy that is successful a certain amount of the time from many simulations. In other words, I’m looking for at least a 70 per cent success rate of a strategy over a sample size of hundreds, if not thousands of tests. (A test run will usually not include the possibility of slippage or spread so live trades can come up short of test results).

The quantitative bit is best done by ourselves. We gain confidence in a strategy by doing this. However, this is not an easy thing to do. We either have to dedicate an excessive amount of time manually conducting the test and therefore have available to us the necessary historical charting capability to do so. Or, we have access to programmes (or design our own) that can automatically run a test of specific parameters; this also can be an issue if we do not keep the test parameters simple and very clearly defined.

And this in itself demands consideration. For example, if we like a strategy (we’re keen for it to work) we might find ourselves running a test adding more and more what if’s until we get the result we want. A better way to prove our strategy until we’ve mastered our quantitative analysis is to use someone else’s. They are available if we take the time to look. For myself, I’d recommend Adam Grimes and some of the selected work by Larry Connors and Cesar Alvarez.

Discretionary trader

Trade with a proven trading process, consistently.

In doing so, we need to decide if we are a systematic or discretionary trader?

With a system method, the rules ought to be precise; buy when the price is above the 200 days high, for example.

But as a discretionary trader, a trade is open to subjectivity. It may include, for example, an individuals interpretation of support and resistance; something that with ten traders will produce several different solutions.

Therefore, as a discretionary trader, a precise understanding of trade selectivity is crucial. In other words, as a discretionary trader, we trade as if we are system traders. That takes some time to grasp. But it is essential that we do.

In addition to either a systematic or discretionary approach, financial trading has so many facets; it is a challenge to know where to start. For example, the technical analysis which envelops the interpretation of charts, set-ups indicators and their associated patterns is vast.

To find a trading way that matches our personality is often a trial by error process. Even a method that works wonderfully well for one will more than likely not work ideally for another. And an edge in this competitive zero-sum game is fleeting.

A systematic trading model requires commitment.

A discretionary approach, however, requires constant practice and a real understanding for it to become our own; and then followed as if it were a system.

The discretionary angle never stops evolving. But, and probably an essential point, we only change slowly and never during a ‘live’ period.

Once we have established our grounding, we attract other thoughts and principles based only on our chosen way, and we can economically disregard everything else; this creates focus and the all-important consistent approach.

How would I describe my discretionary trading technique? I want to think that it is simple and conservative. It looks at a few markets and enters with momentum and dominance from a precise set-up with the appropriate trend.

Disciplined ​trader

As a financial trader, if we say we are performing well, we mean that we have substantial and consistent profits over a large sample size. But they are two different goals. ‘Consistent’ has to be achieved first and maintained as we gradually introduce the ‘substantial’. Each brings its challenge.
In doing so, one of the skills discretionary traders work hard to develop is the ability to see beyond arbitrary divisions in chart structure and to perceive the flow of the market for what it is.
However, the more we trade, the more we firmly realise that the market works in some wonderfully counterintuitive ways. And to add to that, there are significant differences in the ways that equities, futures, and currencies trade. We should not think that one trading system fits all.
My trading foundation is the knowledge that (as Grimes says) “markets tend to work in mean reversion mode after a period of expanded volatility, and in range expansion mode after a period of contracted volatility; this is a price-pattern expression of an underlying cycle in volatility. Cueing into this cycle, and being able to predict the most likely emerging volatility regime, is perhaps the most important skill for the discretionary trader.”
Grimes continues, “in the best case, discretionary trading techniques are an ideal fusion of reason and intuition—right-brain and left-brain thinking—that tap into the most powerful analytical and decision-making abilities of the human trader, but everything depends on a deep understanding of the true tendencies and forces behind market action.”
Once realised my job is to have a detailed trading plan that understands the above quantitatively proven occurrence and then to put on trades dictated by my methodology and setups.
In other words, as a trader, my role is to follow my trading process and to do what it tells me at the right time. That is the principle behind any disciplined trader.