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.

A not for the faint-hearted FX set-up.

From our ‘live’ skype trade room chats. A couple of 70 per cent add-on tactics that are not for the faint-hearted. And a useful quote from the ‘Dealer’ book.

(Buzz) With a build-up below or above a round number set limit entries at zero, five pips and ten pips. Stop 20 pips. Exit 5 pips below (or above if long). 70% probability he (the author) says.

From the ‘dealer’ book, a tactic with a 70 per cent probability.

(Buzz) The author keeps 1/3 of the trade to take further as required.
That is Cable but applies to all.
What is happening is the ‘dealers’ are going after the stops of those that entered short early with tight stops above.
It’s not our broker – not big enough. It’s the big banks.

Further on the above. It’s not real money that’s doing this. Imagine if you usually traded at the 100 million or higher level. And if you don’t do it too often, say you put a limit order in the system (one that you have no intention of activating) the computers would pick this up and make immediate alterations to the currency effected in anticipation. Once the order is removed as a non-event the market re-corrects.

According to Al Brooks, (since the publication of the ‘Dealer’ book), the market has moved on in size. It now apparently takes more than one bank to move the EUR/USD during London/NY open times. But the principle stays the same despite that.

Another comment from the ‘Dealers’ book)……In order to reach this pot of gold, you have to be able to find an approach that accurately trades market corrections rather than predicts them, since technical and fundamental analysis are simply not enough to beat the crowd. The secret to success is actually not such a big secret. Everyone knows that with proper money management and a half-decent strategy you can make money. Yet most still find themselves failing. To become truly successful, if you are a beginning trader you should immerse yourself completely (and I mean completely) in the subject in order to find your edge. If you are already a winning trader, then you had better make sure that you understand exactly what your edge is. What is it that sets you apart from the other 90 % of traders? Is it sheer luck or something different? Knowing what keeps you in the game is the only way to find your way back during tough times. In the end, no one can ever hope to master the FX market; but for those that manage to set the dollar signs apart and focus on the intellectual enjoyment trading provides them, a fortune usually lies along the way!

Silvani, Agustin. Beat the Forex Dealer (Wiley Trading) (pp. 146-148). Wiley. Kindle Edition.

(Nick) A lot to take in there, going to have to read all this a few times, but some fantastic ideas on first read through. (Referring to the above and several items not included).

The round number strategy again. This time Cable. Only works if the build-up is an extension. I’d be aware of a build-up any closer to the round number.

Round number tactic, GBP/USD.

Exciting add on strategy for backtesting. It’s from the ‘Dealer’ book in this instance short at a test of the ten ema. Price action up to that point is critical. In this instance three engulfed bars. Also, as now with all my trades, the trend must be affirmed — exit on the first close above the ten ema. 50 pips.

Aggressive add on to our strategy with a test of the ten ema.

The importance of the spread.

The following is from our Skype ‘live’ trading room chats. Includes: know when to trade and when not; sometimes a trade is too close to call; being stopped out is part of trading, accept it; and two book recommendations.

(Buzz) A case of not only knowing when to trade but knowing when NOT to.
The following trade looked okay. But the context was poor (double bottom 6-hours prior not shown) and again news about to be released. I also didn’t like the seven pip distance to a first stop option.

Know when not to trade.

(Buzz) It’s interesting how if I take a higher entry I’m reluctant to accept as easily a worse price even though it’s a better entry?

(James) I agree. The money isn’t yours until it’s cashed out of the trade. But it doesn’t seem that way when you’ve been 10 pips in profit.

(Buzz) If I hadn’t have taken the failed higher entry, I’d not have thought twice about the short at 7:45.
I’d probably have been entered at the 7:35 bar.
However, the 7:40 bar gave a hint of a reversal. If the 7:40 had closed as a stronger bull, it would have produced a trend break buy.
All in all, some just get missed or are best left.

Sometimes it’s too close to call, best left.

(James) It quite often puts it on a knife edge before it takes off. That was another example.

(Buzz) Took what I thought was a pbc (Pattern break combi). I was way too early. Got to work on the harmony of my takes—a 90-minute hold. Aimed for ten pips but took it off at nine pips profit. Three down and tailless bear close. At that time of night, I couldn’t face another pullback — still, nine pips to balance up some earlier losses.

The upper ellipse marks a high that came within a pip or so of the stop.

(James) Well done holding for that long! Especially at that time of night.

(Buzz) Started reading this, (below) good info so far.

Published 2008, but good insight into dealers.

(Buzz) An interesting point from the book I mentioned earlier, Take each 4-hour session and calculate the pivot point. It’s a guide. Above the pivot point for the follow-on session is only longs and below the pivot point just short. Here’s an example.

Example of how to calculate ‘pivot points’.

(James) Good point, these pivot points are critical.

(Buzz) A good price action trader can look at the chart and know where the pivot point is. The calculation, however, provides some confirmation.

Took the 11 pips profit at the close of the extension bar. But a continuation is on the cards.
Known as a ‘wedge’ which is often followed by a reversal.

(Buzz) In answer to a question. Reference Alan’s question about MT4. Designed specifically for FX. He needs to watch for the spread offered on MT4 as sometimes higher than a broker’s charts. I prefer MT4 to anything else I’ve tried except ProRealtime.

Another book recommendation.

(James) Haha nice hair doo! Good opening para.

(Buzz) Yes, ignore the 1980’s style; a classic and still very much relevant.

(Buzz) About MT4 and the spread that we talked about yesterday and Alan’s question; this is a footnote from the ‘dealers’ book. Spreads were much higher back in 2008. But the principle remains.

The importance of the spread.

Some skype trade room chat from this week (EUR/USD)

I’ve backtested and will continue to regularly backtest the last 10,000 units (about 4-weeks worth on the 5-minute chart). I’m not only working hard at ‘Bob‘ type entries but at my exit criteria. 20 pip is my goal, but I will adjust for market size, reversals, resistance and (something that Bob does not mention too much) price action. For example, an extended bar in a particular context (see below) will see me exit; I will also exit with engulfing bars too, but context always rules.

An example from my back testing.

The last hour makes for an interesting analysis. I took bar 4 below as a signal bar. However, it was much too weak against the pullback of bars 1, 2 and 3. Bar 5, my entry bar, touched a full pip below bar 4 – my entry. Bar 6 closed above the long-standing resistance, now making it support and a possible entry long on the following bar. Bar 7 provided a floor (ceiling) test. All a bit weak against the previous bear bars, but if not a long a good reason not to be short?

Signs to watch for that indicate a turn in the market.

My understanding had me orientated for a trade short for some odd reason only known to me. (see below)
Short at 1 and out at 2!
Then long (thank goodness) at the 11:40 bar.
I held thinking it would do the 20 pips. But It’s been consistent recently at 10-pips. (Refering to how much the market has been moving)

The importance of staying neutral as price action builds.

James,
Good timing on the long! (Still on the chart above)

Buzz,
Out soon after the 12:05 reached a high and pulled back.

James,
It did pull back, looked strong on the way up. 10-pips in this market is a good call. Reasonable resistance from yesterday at that level.

That’s the move of the day

…so far

Buzz,
On the last take, I entered on the first full pip above the 11:35 bar. The bar had closed above my pattern. However, the momentum came in at the ‘double’ pressure created a pip above the double top of the 10:20 bar. It’s not apparent looking at the bars now.

Buzz,
Below is an excellent entry set-up except for no signal bar.

No signal bar, let it go.

I was all ready to enter short at a full pip below the signal bar (pb horizontal) when the price shot down to the ema. It left me behind. The pullback, on the bar after the planned entry bar, was very slightly short of my desired entry position.

A still screen shot does not provide the speed of price movement. It’s often more difficult live.

I gave this one a small run for its money (See below). It was held to see if it would break the top, already reasonably high in this bull push.

A trade already high in a trend is an uncertain trade.

(Below) Bar 1 as an entry bar was against the trend. However, the prior legs were a lower low and a slightly lower high. I took this trade but came out after 3-pips as it ‘felt’ too early to be making a short. Bar 2 had no signal bar. The pullback to the horizontal pattern break was acceptable, and I would probably have entered at the pattern with bar 3. But a bunch of news was due for release on the following bar.

A good trend does not always provide good entries.