Data continues

The algorithm data continues at pace. Now at nearly 60% profitability with a 2.88 profit factor or reward/risk ratio for EURGBP. But that is not the whole story.

The above is the figure for our best pairing. The one on which Nick has focused. However, a dozen others (majors and a few significant minors) run a close second.

Each pairing is individually tested, and the algorithm adjusted as needed. For example, best market entry timings are specific to each currency and its pairing based on volatility look back.

And determining the market cycle has been improved by introducing a Japanese line break chart—a movement chart rather than a time-based chart.

A minimum Euro VIX (volatility index) is incorporated in the algorithm which—being USDEUR based—will require testing as to its applicability (if any) on other FX pairings.

Nick’s test is designed for an hourly chart and looks for entry/exit solutions over the past 750 days—figures above are providing trades (tested yesterday) on 223 days. In other words, we’re seeing trade entries from one to three days on average.

This delicate balance of ratios provides the best net profit. However, Nick can make adjustments to the algorithm (in the VIX and others) whereby per cent profitability increases significantly and the reward/risk balloons, amazingly, to well over five.

However, in this instance, the number of trades closed and the net profit achieved decreases substantially. In this instance, we could increase each transaction to a higher average per cent per entry (currently trading at one per cent of account), but we know that to do so is not sustainable or practical in the real world—drawdown for some trades could go through the roof for one.

I do remain a discretionary, rather than a system, trader—for the time being at least. But Nick has brought a quantifiable aspect and improvement to our methodology. This week, I found that taking trade entries from Nick’s quantified indicator system and transferring them to James’ subjective value drawings (rather than the other way around) have worked very nicely thank you.


We needed more trade data, so Nick taught himself to code. In other words, computer programming to test trade conditions. He has become extremely good at it.

Okay, he started from a high baseline. A spreadsheet wizard—and a master’s degree in engineering—he has some mathematical skills!

As a trader himself, he already knows what’s practical. We both spent a couple of weeks of the festive break poring hours into coded trade development.

What I’m talking about here are algorithms that give trade entry and exit conditions.

Did it work?

The surprise was what didn’t work—off-the-shelf indicators for one. We tweaked and adjusted the conditions and continually run the strategy tester. But the results were poor.

That was when we knew that we needed to develop original code, based on an edge.

We went with a (structured and systematic) trial that tested intraday price conditions against the previous day’s daily price levels.

With a trend-criterion agreed it then took dozens of pages of code to run the what-if conditions. Some worked, many didn’t.

Each test looked at the past two years of hourly price movement. We studied the results of net profit, trades closed (total), per cent profitable, profit factor, maximum drawdown, the average per cent per entry and the average number of bars in a trade.

Without a similar test of strategy—carefully coded and adjusted trade parameters—how would anyone know what they’re doing works?

They don’t.

In our testing, each change or addition to a strategy often improved some figures—or increased drawdown slightly —but significantly reduced the number of trades taken and, therefore, the overall profit.

To make a small correction in condition improves one trade but taken over multiple entries is often a loss-maker.

The trial confirmed that the change in profit factor (reward/risk) has more effect on profit (per improvement condition) than an increase in the percentage of wins.

However, our limitation with intraday is the end-of-day close. We elected not to take a trade overnight as brokers’ do not provide an automated exit condition that met our needs.

A trailing stop was not profitable, and other solutions increased the maximum drawdown unacceptably.

However, we achieved some 60% profitability and with wins being twice that of loses, and with acceptable drawdown. We were jolly pleased too.

Use a checklist.

Gambling, betting or speculating? What’s the difference?

After reading Jim Paul’s book, it got me thinking about my system. What was I doing each time?

What we want to do is trade, but are we sometimes betting? What’s the difference?

How Paul sees it:

  • If it’s for entertainment, then we’re gambling.
  • Emotionally attached to the outcome—and ego is involved—then we’re betting.
  • Assessed the risk and the probability the chances are it qualifies as speculation.

Trading, on the other hand, is speculation that follows a plan.

(The same applies to investors, just over a longer timeline).

Sounds straightforward. But in the heat of the (trade) moment what was I doing? What are the clues?

Do I get upset, even mildly, when taking a loss?

Alternatively, do I get quite pleased with myself when I record a win?

Was my risk measured, apportioned and applied?

Did my ‘trade’ follow my plan (precisely)?

Did I improvise in some way?

To ensure I have a trader’s approach—and that I don’t lapse into what could be categorised as betting—I use a checklist.


When I’ve developed my trading plan, and tested it, I take a lot of time to distil it into a checklist format.

As an ex-aviator, checklists were very much part of working life. However, ironically it was the book ‘The Checklist’ by Atul Gawande (a surgeon taking lessons from aviation!) that brought home the more profound need for a checklist.

Checklists are not a bullet abbreviation of a plan. That wouldn’t work. Still too detailed more likely. An index for aviation, surgery and trading is often time-critical. Therefore, such a reference is an item all on its own.

It contains stuff that if missed, could be very unhelpful if not catastrophic.

Maybe items not found in a manual or plan.

An example Gawandy uses is the checklist from a light aeroplane where one emergency starts with the words ‘fly the aircraft first’.

My trade entry checklist has such a beginning: ‘(on review) at the month’s end, will this entry be apparent?’

My trading plan is one thing, but to make sure I implement it speculatively (as a trader)—and keep mister ego at bay—I need my checklist.

What’s most important: trade entry, management or psychology?

In the last blog post, I mentioned that a trade entry process, management of the trade and the emotional challenges are each equally important.

The vast majority of the information available to us is, however, based solely on entry procedures.

Some gurus say (and for a good reason) that profitability is a function of the management only and—what is now becoming more realised—the emotional decisions we take with each trade.

I’m staying with the full package, evenly split approach—an exact entry requirement balanced with proven trade management and a no doubt (unemotional) exit strategy.

As for entries, there is a myriad of ways to trade. We have to find what works for us. I use a combination of trend and channel lines, price action and—thanks to Nick’s coding—unique indicators.

The channel lines are provided by James, who has a very natural affinity for this work. To look at the simple trend line structure below, you may get a false impression. Simple but—for anyone that has tried to do this for a living will attest— far from easy. To determine a workable contextual trend with barely one touch is exceptional.

The crosshairs in the chart above represent my short entry position in a trade last week.

The charts below show Nick’s objective indicator of the same trade. The lower red line (green line above if I were long) represents a 50% probability objective based on the yearly bar averages. The white dots are my ‘average true range’ to establish risk, and the shaded red and green areas represent the wicks of the prior daily bar that assist with macro price action.

The objective probability indicator is handy in a ranging or (medium to shallow) trending market.

We can see from the above example—of acceptable probability—how our entry, management and exit process might work in unison.

Of course, it is when it doesn’t go so well that the synchronicity or not of the three elements shows.

Beyond Mediocrity

In day trading, what is the most essential—process, management or emotion?

The answer is all three, equally. However, we naturally prioritise the ‘how to’. We ignore the second and nearly all of us are ignorant to the third.

But without each working synergistically success (the one per cent of trader’s status) is not possible.

Discretionary or system trader? A muddying of the water, as without an algorithmic programme we are both.

And when we are both (nearly all professional traders are), success depends on the resilience of our so-called system and management plan (and therefore our confidence) and the curtailment of discretion—in other words, keeping instinct (emotion) at bay.

Through backtesting or paper trading, we practise our trade entries and management. But it is only in live trading, and at an amount appropriate for our account, that emotion can interfere.

Instinct, psychology or emotion—by any name it is primarily responsible for a trader’s eventual mediocrity.

Discretion dominates in the first few years of a trader’s progression.

Our trade process then takes on a more systematic approach; we become consistently profitable.

Our trade management is precise and appropriate to all conditions.

We are on a roll!

However, without control of our emotions, we will only tick along.

A stoic approach in itself is not the answer. Indeed, by itself, it is a sure way from profitability back to mediocrity.

It is more. To achieve precision in our work is to trade without inappropriate emotive decisions interceding. It comes from preparation, mind and soul in harmony, systematic processes and the harnessing of ill-suited discretion.

It is beyond mediocrity.

1% profit—super

“There is a world of difference between a net profit trader and a super trader”, Schwager says in The New Market Wizards.

Getting to the level of net profitability is an exciting achievement. Not to be undermined. However, to graduate as a super trader, which I guess means being super-profitable, is every trader’s goal.

That sentence will mean entirely different things to each individual. But if we say it is relative to account, then the meaning ought to be proportional to everyone—to some extent or other.

But let’s not get too carried away with the term ‘super’. We’re not some Marvel reincarnation. Indeed, we should not associate the word exciting with trading. Better to use, calm, focused and flow.

What is possible

My aim is 1% profit per day. As a day trader, this is appropriate. Traders using, say, daily signals will need to determine their profit timeline. But that is the beauty of day trading—precisely bracketed, a start and a finish.

I previously thought that a profit for each trading session (a day for me) was inappropriate. I thought it was too precise and that a week, month or quarter was a better profit timeline. But it is too loose, too undefined. It allows inappropriate bets because we feel that we have time to correct. Trading is not an allowing game!

But I agree, a beautifully crafted methodology, edge and management come first. Once sorted, we take responsibility and narrow our profit goal to the finest of timelines.

Is it enough?

One per cent does not sound a lot. But over 200 trade days a year (allowing for weekends and time away) We are considering a 200% annual mark-up. Is this not worth the trading perseverance necessary? If we sensibly compound our risk-reward (such an increase is a challenge in itself), then we might conceivably be looking at a significant increase on the original sum.

Is this possible? It seems to have been for a very select few. But as Schwager mentioned in The New Market Wizards in the late ’80s, we are up against tens of thousands of professional traders.

Goodness knows what the figure is today and with computer algorithms.
However, if we work our edge with patience, confidence and attention, the consistent 1% incremental results are (super) achievable.

Don’t get trapped

When speculating in the currency pairings—the most significant market by far on a daily traded basis—we have to be on our toes not to get trapped.

Buzz day trades Forex. The only time he holds a trade overnight is when he’s trapped. An event (being trapped) that every trader has to strive to eliminate. But how do you do that?

(Trapped is not merely being out of the money, which is something a trader experiences on nearly every entry. Trapped is holding an out of the money event beyond a pre-agreed level—either through emotion or by mistake).

Being on the wrong side of a directional trade is the risk of doing business. It is part and parcel of the job. However, there is a world of difference in taking an acceptable loss and trapped.

Trapped suggests that a trader has held beyond an acceptable loss position and has ventured into account adjusting territory—not a smart place to be. Not only is the situation emotionally exhausting as well as potentially account debilitating, but it also distracts the trader from other trade opportunities.

Swimming with sharks

It may be difficult for an observer (a non-trader) to appreciate the implication. To trade currency pairings is only achieved via a derivative account of some form or other; to deal with leverage and margin.

A while ago, legislation limited the amount of margin possible on a (derivative) position for retail traders. Buzz believes that this was mostly a good thing. It helps prevent over-trading. However, he says, it also draws inexperienced traders into the lower timeframes—day trading in other words.

Margins of up to five per cent do not provide lucrative possibilities with a small account on daily Forex charts. Drawing the unsuspecting novice further down the timescales in search of riches but blind to the significant increase in risk. They go from pool dipping to shark-infested waters.

The lower timeframes bring the plethora of news events into play. One of the reasons Buzz trades the highest of the day trading periods, the hourly bars. Day trading requires a more focused and, therefore, dedicated management style than is necessary if trading daily charts.

Trade management

Trade management is a crucial skill to learn. But what is all the fuss? Have a method, backtest sufficiently to be sure of an edge and put it all into operation.

Unfortunately, live trading brings a whole new level of difficulty than is experienced in a systemised trial. The future market is not necessarily the same; live timeframes can seem both more expanded and contracted. Live markets bring emotion generated by the open bar, and not experienced in the benign backtest.

Trade management, arguably, can only be developed during live trading. It is therefore imperative that new systems are (live) traded small and over some time for the establishment of management rules.

As Buzz points out, to do otherwise significantly increases the probability of becoming a ‘trapped’ trader and in Forex, margin can grow at a blistering pace. Trade small, build slowly with particular attention on trade management rules and above all—don’t get trapped.

Hurry up and fail

Hurry up and fail (quickly) is, according to google, a well-known quote—I can’t remember where I first read it. However, the principle behind it sits well with learning to trade.

We must understand how the market works (for whatever instrument we trade) to the point that we can develop an independent strategy. It may not be a revolutionary trading method as most things have been tried, including trading via astrological patterns!

But within a trading system, how we do things have to be of our design. Tried, tested and failed—and started again. Over and over for what might seem a lifetime, which might be, or it might seem like it has been but in reality, is only a few years. If we think we can do this in a few months, then the likelihood is that we are still in the fail phase and haven’t realised it yet.

I think that to go through the fail quickly phase on one’s own is significantly more difficult. Probably why the vast majority don’t bother and buy a strategy instead, unfortunately, those that do so are, even those that win initially, still failing.

My thanks to James and Nick. James, for the daily technical analysis that far exceeds anyone else that I’ve witnessed. And Nick, for his mathematical and now, it seems, a coding genius in developing his non-lag indicators that work.

As a trader, I use James’ analysis to find value and breakout entries. Nick’s indicator confirms the validity of the trade, assists in its justification and, importantly, provides a probability objective.

From one of our trades this week the diagram below show’s James’ drawing of what we refer to as the confluence of the anchor and contextual lines. (In some instances, we may employ the micro and macro lines too). A value entry usually involves the anchor and contextual cues with the trend (or the appropriate ‘always in’ direction) associated with our timeframe.

The skill above is that most of the lines were drawn before many of the bars materialised. We also trade breakouts from the micro or anchor. And with the same directional stipulations as mentioned for the value trade.

The diagram below is Nick’s probability indicator which we use to assist with the entry and ascertain that we have a reasonable, 60% or 70% probability, reward/risk objective— taken from the prior 5,000 or so bars of the timeframe traded.

Value/breakout is an approach we have failed many times. But we have also had much success. It is one that makes the most sense to us and one we will continue to improve through intensive backtesting and analysis of our live trades.

Fund results to date.

Context is king

In technical trading, as in any other discipline, once one gets to a reasonable level of competence, any change in a method can have a complimentary or overly detrimental effect.

An example that often happens is the introduction of an indicator—one in which we place way too much reliance. We have all been there and done that.

As a price action trader, and other than a moving average, Buzz reads a chart without indicators. Some price action traders find a particular sign extremely useful in helping confirm the probable direction of trade or trade volume.

If a trader understands very precisely what they are doing, can replicate a trade time after time through market cycles that are, at the moment, somewhat uncertain and be profitable then they have an acceptable method.

The trick is being consistent enough and therefore build a record of similarly taken speculations to know what works and what doesn’t. We can follow another trader’s methodology like we would a recipe but rarely does that work as intended.

Possibly because of the complexity of trading, another trader’s method is not detailed enough to convey the exact desired intent of the teacher. It would be like trying to copy an Olympic track cyclist. We can buy the bike but without the Olympian’s training the detailed knowledge of how-to breath, specific muscles and a thousand other things we’re not going to get a medal.

In price action trading, James always points out the importance of determining value before recognising a breakout or bar pattern. Value, in this instance, is contextual and bar pattern is the shape or size of one or a group of bars.

Most price action traders rely wholly on bar patterns. They are relatively easy to learn and convincing. However, without the infinitely more difficult understanding of value (or context), their use in isolation would be detrimental to a traders account. More so, the lower the traded timeframe.

Buzz spends an excessive amount of time practising contextual reads. In his trading method, it is all contextual. To do otherwise, he says, would be like getting on that bike and going the wrong way around the track. That is what most of us (traders) do!

How champions think

Thank you JB for the game of golf a few weeks back. A beautiful walk in idyllic surroundings. JB played masterly, me not so much.

Having played golf regularly a couple of decades ago, I decided that before my game with JB, all I needed were a few concentrated practise sessions.

In turn, this led to finding and using some excellent on-line golf instruction. Unsurprising, for the short time that I had, this led to overthinking my swing.

In Dr Bob Rotella’s informative book ‘How Champions Think’ he points out that the majority of great golfing names (Nicklaus included) stayed with the same coach and swing throughout their careers.

They kept it simple—but that does not mean easy.

A trading style has the same battle. We’re forever tweaking, following guru advice and looking for the thing the other person is doing.

The week before last Nick and Zoe (and Rubix, a 14 kg puppy) visited staying in a holiday villa we’d booked nearby. I took the week off trading (sensibly), but this still allowed me a few hours each early morning to backtest and reflect on my trading strategy.

My most consistent results come from a simple trading method. An approach fundamentally unchanged for as long as I can recall but steadily improved upon within its bounds.

With this strategy, time after time, I know it when I see it—my entry method, risk and target. Bang, done. Emotion does not have much hope of interceding.

I’m pleasantly pleased with my results this week with my simplified routine.

I’d define it as a short-term micro breakout with context trade. I’m particularly content with the plans regimen and, as it’s a breakout, it’s often quick conclusion.

Fund results to follow in a while and in particular the stats—in isolation—of this micro breakout method.