I flew fast jets for 30 years of my life. I've traded full-time, more or less, for the last ten years, initially from fundamentals and over the last few years as a dedicated day trader. I live on the North Norfolk coast.
The FTSE 100 has seemingly gone into freefall taking out all gains since mid-2016.
A fall in the value, to some extent or other, can be seen in all indices; and with much uncertainty to follow in 2019.
Selfishly, this is not our concern with the Slow Trader fund. We are over 41 per cent up since the start and without the worries that plague traditional funds. See Slow Trader Hedge Fund.
We can make that last comment with some confidence because of the way we trade. We day-trade on a small time frame, but we buy or sell (long or short) with little bias to the fundamentals. We only go where the price action is going.
A justified objection to day trading is the unexpected effect that short-term news can have on results; this is valid. But we trade away from news events whenever possible, and quite often a warning of a prior news spike will show to the watchful trader.
‘Breakout day trading’ parts one and two provide in some detail how we traded for most of last year: an aggressive breakout style that can result in significant gains; and, as much fun as that is, in matching losses too. Not so much fun.
However, much of the information contained in ‘breakout day trading parts one and two’ is valid hence the reason for leaving these pages available for review.
We have moved to a more cautious style of breakout trading. The gist of which is in ‘my mantra‘ or can be glimed from a glance at the selection of trades posted in the ‘chart debrief, Buzz‘ section.
A detailed description of our ‘conservative’ trading method will follow as 2019 progresses.
We know that our revised and cautious and compounded trade procedure will provide the future build in the fund that we want.
To qualify as an expert trader, we run our trade account as we would a business. Any founder of a new company will need sufficient capital to get started, they will take as little as possible from the industry and will put all their energy into growing the capital of that business. We do the same with our trading account.
A consistently profitable trader can utilise the massive advantage of compound interest.
Consider that we are a consistently profitable trader that does not calculate the compounded amount per pip on a regular basis. We start with equity of £15,000 and have a consistent daily profit of £75. After 232 days our capital will be £32,400.
If we consider that we are the same consistently profitable trader but this time we adjust our amount per pip regularly by the ‘risk level of each market‘ calculation then after the same period of 232 days our equity will be £75,443.
A somewhat simplified proposition, but the principle is clear: we must apply a regularly adjusted calculated and, therefore, compounded amount per pip.
The previous week James, Nick and I (Buzz) met in Bristol for a few days for a day trading pow wow.
Our agenda was to agree a defined method of trading, to backtest that method in detail and agree on markets we would each trade.
A comfortable aim at the outset, maybe. However, as with anything worth doing its beginning needed to bypass egos, emotions, ‘set in our ways’ experience developed over several years and, therefore, generalised methodologies. An immense struggle. But, we all felt that we had got to where we wanted to be by the end.
In our first week of trading following the gathering we had decided that for now each of us would trade a single but different currency market.
Trading multiple markets, although potentially providing more entry opportunities, actually resulted in more (early) abandoned trade entries as the observation of one market would often incorrectly influence the judgement on another.
Moreover, observation of a single market provides more harmony for that market as each pairing have specific traits, news related releases, spreads and a certain rhythm of volatility.
Even after a single week of applying the ‘only one market’ restraint, we have seen a significant jump in the possible combined trades achieved. We have each become a specific currency pairing specialist.
Not to say that having mastered the single market we will not expand to two markets per trader. At the moment, however, we like the results, and in any case, it is highly unlikely that we would take on more than two markets per individual.
The 4th amigo
We’re also in the very early stages of training a fourth member of the team. But it can take many months to years to bring someone up to partial let alone full account trade ready.
Plan, brief, execute and debrief.
Our muster in Bristol encapsulated our ‘plan’ phase of things. Our brief is our individual (written) mantra, and the ‘execute’ is our daily trades.
Publication of a weekly debrief in a video, or written format will happen via this blog. In the meantime, we discuss events between the team daily when we can via Skype.
James and Nick currently trade at the minimum amount. The next step is for them to participate at a quarter of full risk and so forth until able to consistently take maximum risk trades. (See blog post ‘conservative breakout trading’ for our risk amount calculation).
Day trading does not mean overtrading. Far from it. As we review our trading strategies, one or two trades a day is typical for us, and often we can go for a couple of days without a take.
Even in the defined methodology of our ‘conservative breakout’ strategy patience is a vital ingredient.
It is essential, however, that by being particular with our entries, we do not unknowingly manifest reluctance – which in turn can bring impatience.
To help negate this, we use a well-established method between ourselves of a plan, brief, execute and a debrief.
How does this improve our work? It makes our approach considered, open, exact and, therefore, honest. That is we review our plan in clear language, openly express our methods, know when to get down to business with focus and be forthright in what we got right as well as what we got wrong.
But what about the economy?
In our approach, the state of the financial market gives us relatively little concern. Over the last couple of weeks, traditional investors will be wondering (having enjoyed a most incredible stretch of profitability) what is best to do.
In contrast, we go from day to day taking each moment as it arrives with equal consideration. We are not concerned with external pressure other than the occasional economic calendar information a few moments before and after the news is released.
In a way, this puts us firmly in control of our possible gains and our losses (part and parcel of financial day trading). With a well defined and practised method we might even be very successful – maybe not each day but on average over every few days. And that control brings a sense of consistency and purpose.
Then we can let compound interest do the hard work.
A slow market this morning. Little news until this afternoon. But a trade is a trade, and the best looking chart is not always the most profitable.
We got suitable signals from both GBP/USD (top chart) and GBP/JPY (bottom chart) at about 09:45. GBP/JPY some five minutes earlier. Although the price action favoured GBP/USD, Japan showed its colours earlier.
A trade is a trade, so we entered short GBP/JPY (the lower chart). The price action that looks the best does not always provide the speediest or best result.
We asked ourselves (1) what is the dominant price direction and are we following it, (2) is the market trending or ranging, and finally (3) is there price action that may interrupt our desired track to target?
Our answer to each was acceptable, our only concern with GBP/JPY was the significant number of 14,800 that we had to traverse on route to our goal of 30 pips.
On the other hand, if we had chosen GBP/USD its magnetic number of 13,200 slightly above possible entry, would have been an issue also.
A better plan would have been to take profit at the 14,800 price range and reassessed a reentry. But in hindsight is always easier.
First trade of the day. EUR/USD short for 19.2 pips.
Some great opportunities are often provided as the market transitions from the Asian to the European market time at about 8 am.
The UK market opening at 9 am often more volatile and regularly contains economic activity. This morning at 9.30 am, for example, has a GDP release for Stirling.
As conservative breakout traders, wherever possible we avoid the uncertainty that such news provides.
Our trade this morning is slightly more aggressive than usual. See chart below.
The Asian market provided a strong buffer above the 11,500 price level. The breakout short slightly after 07:00 was not an entry for us. Price bounced (reasonably aggressively) off the significant number of 11,500.
However, bar 1 and the doji before also on the 25 moving average line favoured a short. We entered on the close of the second doji (bar 1) which made our 19.2 pip target some 30 minutes later at bar 2.
An update to our last screenshot. We Quite like the mix of GBP on the left and EUR and AUD on the right.
GBP traded with (x) ticks set at 1470. The right-hand column is at 5-minute bars.
Our strategy is a conservative breakout for each market; however, we will use our probability momentum strategy with GBP in a strong trending market.
The red arrow shows an entry from this morning in GBP/USD. The opportunity presented itself in both GBP markets. As we only trade one market at a time, it is a matter of picking one.
The Asian market time is often quiet regarding volume or bar size and movement. However, occasionally a good trade or two present themselves. Having said that very little happened in this trade until the European market opened at 8 am. The UK opening at 9 am often more voluminous and, this morning, coupled with European economic news.
Hold the line
As the trade tickles the target line we are watching closely for any ‘technical’ sign that we will not achieve our goal; this is an awkward moment for novice traders. Our rule is that we always hold until target unless we have a definite reason not to such as technical, resistance or reversal. To show how difficult this can be, price in this instance cleared target and spread by a pipette then headed north. Fortuitous for us, maybe.
Our style of trading has progressively moved to conservative breakout and where we compound our traded amount daily.
Even on the 5-minute charts, this approach provides for few entry opportunities. But as we are trading at our maximum amount ( after we have established that we are consistently profitable), this is not an issue.
The compounding aspect missed by most traders but is a most powerful aspect to the methodology.
Our method lends itself to observing a few charts at once (three to four). However, we only have one entry open at any one time.
The pointers below provide suggestions on setting up the charts and for the daily calculation of trade amount per pip.
The four markets below fit the screen better than three. We use the top left (EUR/USD) as our anchor screen. That is we scale every other display in proportion to the anchor screen.
To do so, we manually adjust the ‘price’ axis to provide the look that we need. For EUR/USD this is a width of about 100 pips. The other screens scaled accordingly.
Our method is for a fixed stop and target providing an essential and consistent 2:1 reward risk. (adjusted for spread). Again, using EUR/USD as the template, we scale the other charts accordingly as a percentage of their opening price for the day.
The candles seem tighter than most will be comfortable but with a little practice, it quickly becomes apparent why this less volatile appearance is more suitable to the conservative breakout trader.
We trade a single market at any one time and, therefore, a single price level. In this regard, we can be accurate with our amount per pip. Take the example of our favoured market, EUR/USD. At the start of each trading session, we calculate our amount per pip which, unless the market makes a significant price difference, is maintained throughout the day.
Assumptions for the example: market value 11,640, margin 3.33%, equity 15,000 (50% of equity 7,500) and overall risk not to exceed 2% of equity. Note: we use 50% of our equity as we are looking for a margin during any one trade to be very close to the 50% mark.
EUR/USD 10.8 pip stop.
Margin at 3.33% 11,640 x 0.0333 = 387.6 then 7,500/387.6 = 19.3 (price set per pip)
2% check A: 15,000 x .o2 = 300 (max risk) B: 19.3 x 10.8 (stop distance) = 208.4
The 19.3 in the example above is our amount per pip. In the 2% check, ‘B’ is not to be greater than ‘A’.
Note that (as is the case with AUD/USD) a market with a margin of 5% then the margin calculation above would be multiplied by 0.05 rather than 0.o333.
In our fledgeling expert period, we complete the daily calculation but trade quarter of the amount and increase in quarters as we become surer that we can fly.
When entered into a trade using the amount per pip as calculated above margin will go a few percentage points against us if the deal is negative and vice versa if positive.
Many advanced charts have an (x) ticks facility.A tick represents a transaction between a buyer and a seller at a given price (and volume, except in FOREX). In the (x) ticks chart each candlestick shows the price variation of x consecutive ticks.
The (x) tick chart is not time-based. Therefore, each currency pairing in our trade list will close at different times. Moreover, the bars in an (x) ticks view are representations of transactions, and their frequency is variable. For example, over one period we may have 50 bars, and in another period of the same timeline, we could have 75 bars.
Backtesting of multiple currency pairings is the best way to determine if (x) ticks provide suitable trade opportunities for the individual. The example below shows EUR/USD 30 minute bars with one trade entry opportunity in the leg shown.
The chart below uses the (x) trade setting with x being 3,000. In this leg example, two trade opportunities are available. However, this is not to say more trade entries exist with (x) ticks as it all depends on the timeline set (above) or the ticks set (below).
How many (x) ticks
How do we select the (x) number of ticks to view? As with the classic intraday time-based view, this is a personal choice but one which must be mostly proportional to market spread and the mean of the bars traded being a suitable size. If we use 3000 ticks in EUR/USD for example, the leading price action of using 3010 or 2940 will not alter, but the trade opportunities could be significant.
Based on Bob Volman’s day trading with 70 ticks we backtested higher amounts divisible by 70. Some areas of the test are subjective as to whether we would or would not have entered a prospective trade.
In the lower timeframe (or tick frame), 1470 and 2940 ticks provided, for us, the best results over a wide range of tests. Tick bars do not correlate well to traditional time-based bars. However, our ticks above would at certain times of volume provide similar representation to 5-minute and 10-minute bars respectively.
Our favoured higher (intraday) tick frame is 4410 ticks; this equates closely to the half-hour bars on a standard time-based chart. The image below is a 30-minute chart superimposed on a 4410 tick chart over the same period.
In the first half of the image, the ascending 30-minute bars are on the left and in the second half of the picture, the tick bars descend on the right. Those proficient in price action identification will notice a tick bar entry opportunity in both the ascent and descent that is not available to the 30-minute bars.