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.

The patient day trader

“The stock market is a device for transferring money from the impatient to the patient.”- Warren Buffet


In this blog, I will talk about that rather apt comment by Mr Buffett and how it is relevant not only to the long term fundamental trader but, surprisingly to some, the day trader too.
I will also take a look at how the amount we place on each trade can often be an oxymoron.


The impatient.


Bob Volman says “The more a trader adheres to a strict set of entry and exit rules, the less likely they are to fall prey to challenges of the emotional kind”. From my own experience, I know the importance of those words. That is why many trading seminars can be dangerous for a traders bottom line.
Some such events provide a plethora of trading strategies, and this leaves a massive door open to an individuals interpretation and intuition. Or, in other words, a traders impatience. Successful traders refer to working without the need for a reward – if we want the money, it will be elusive for us. What keeps us emotionally separate to the financial outcome as much as is humanly possible is holding to an understood, extremely well practised, strategy. Within that strategy, we ought also to know without question where our boundaries are for an aggressive take and at what point we skip (but not through fear) a set-up even though we have waited for the longest time. That is a mature, unemotional, trader at work. Our success is not necessarily the trading system we adopt (or create), but how we apply it. An obvious consideration maybe, but probably the most significant reason that prevents a seasoned ‘breakeven’ trader from graduating.


The amount traded.


Connected to our thoughts above is the amount we place on each trade. At one extreme we have a demo account with no real risk attached, and at the other, we have an amount that is beyond reasonableness for our consideration. My blog ‘conservative breakout trading‘ covers this in mathematical detail. What I want to marry here is patience and the risk we give to each bet. Of course, it would be foolishness of the highest order to trade large within a strategic vacuum or where a strategy has not been tested, practised and, therefore, approved. However, once at this point in our trading journey, if we remain a light trader (that is a trading risk significantly below our potential), then we most certainly invite impatient trades back into the fold with its inevitable cousins, uncertainty and fear. A proficient day trader who regularly compounds their trade amount (say, to match a 2 per cent risk to account size but not beyond the margin requirements) have a trade approach that is, well, professional.

Slow Trader Fund update

 An increase in Slow Trader Fund profits and new investment added. See table below.

Day trading:

  • A day traded fund in Forex is deemed as risky by most. To trade this way attracts the boom and bust people. Hence the planned European increase in the margin that we have discussed.
  • Day traders that are not boom and bust have to accept an extended skill learning period, which few are prepared to do.

Day trade amount:

  • Over time we plan to trade the Slow Trader Fund at a risk that is 1/50th of the fund per trade. (throughout our skill development period we have bet at about 1/100th). We take several trades per session.
  • For example, take a Forex day trade with a £50,000 funded account. Such a statement would attract a deal of £500 risk with the option of a second entry also of £500 making £1000 risk  (1/50th) per concurrent trade.

How we’re doing:

  • We take statistics of ‘how we’re doing’ from batches of 20 trades. We accept a loss rate of 4 to 6 trades out of 20 – therefore a 70% to 80% win ratio. Anything less requires a review of tactics. A 50% loss rate would necessitate a review of the underlying strategy. (More recently, several weeks, we’ve achieved a 77% win ratio.)

Commodity trading:

  • We are also looking at reintroducing longer-term commodity trades to the Slow Trader fund. Both Forex day trading and longer term commodity trading use the same strategy with the addition that the commodity trades would only be in agreement with the COT report.

 Slow Trader Fund withdrawals:

  • As we primarily day trade, funds can be withdrawn at minimum notice. Withdrawals of your full lot amounts (e.g. JB2) would be preferential.

Trade timetable:

  • We aim to trade the fund for 200 days annually. Manageable, but we don’t trade weekends, some of the USA or UK national holidays, times of significant news due to unpredictability and most Friday afternoons.

The last four lots are new money as of 1st March 2018.

Day trading

As Jack Welch told us: “change before you have to.”

Beginners are attracted to day trading because, most of us when we start out, only consider one thing: risk.

With day trading we’re offered a low-risk, and the beginner takes this (usually unsuccessfully) with low probability entries.

The professional counters by taking high probability opportunities.

This often requires close attention for long periods followed by quick and decisive action.

Like all the best games, day trading is easy to learn but hard to master.

As Seth says, “if failure is not an option, neither is (the) success.”

Risky

Readers will know that our chosen trade method is day trading a currency pairing.

People that are not familiar with how we go about our business will think ‘gosh, that’s risky’. And of course, to a large extent, they are right.

As with many disciplines that require a great deal of skill and practise (to merely achieve mediocrity), it comes across as risky because most don’t take the time and effort to learn.

Ironically a significant draw for us to day-trading is the control of risk.

Our e-book on the subject, release date within the first quarter of next year, shows, in some detail how this is possible.

Day trading, if done well and with practice, can provide a consistent daily or weekly return. So unlike other more traditional trade or investment methods.

With all worthwhile disciplines, it does not come to us overnight.

As Seth Godin said:

“The hard part is ‘steady.’

Anyone can go slow. It takes a (particular) kind of commitment to do it steadily, drip after drip until you get to where you’re going.”

Algorithm to trade by

Nicholas Taleb, in his book ‘fooled by randomness’, suggests that “some psychologists estimate the negative effect for an average (traders) loss to be up to 2.5 the magnitude of a positive one”.

Therefore in short-term trading, and particularly day-trading, that is a lot of pangs.

A longer-term investor may check her portfolio, say, once a year. If she averages a 15% gain per year, then this investor will have an emotional pang about one in nine years.

The expert day trader on the other hand (the beginner and intermediate trader are off the scale here) will have 7 to 15 trades per day of which about half will be an emotional drain. Leaving the trader some 250% more emotionally drained – and that’s on a reasonable day!

Beginners are attracted to day-trading because it sounds cool, and, as a stop order can be less costly in a low time frame trade, they can trade for less per deal than on a higher timeframe chart. An individual’s chance of surviving the beginner to intermediate to expert in day trading is slim.

An expert day trader, coached or a graduate from the ranks of the higher time frame trades, will, I feel, only survive the emotional pangs of day trading if they develop and follow an (unemotional) algorithm.

Day trading is only for the full-timers

There are so many ways to trade – choosing a way can take forever.

The forms of trading include positional, swing and day trading.

Most investors through investment banks, pension funds and mutual funds have their savings with positional traders. Positional trading takes the long-term view and is, if not exclusively, based on the fundamental information.

Swing trading, on the other hand, is broadly considered to be trades that take a few days to a few weeks to complete and can be a mix of fundamental and technical.

Day-trading, by simple definition, is a trade completed before the end of a day.  It is based on technical information only. I prefer the term ‘short-term’ trader.

Some years ago I started with positional trading, fundamental information and how to read financial reports. I then moved onto swing trading and used a combination of fundamental and technical.

It was only more recently, a couple of years, I made a slow transition over to short-term trading and now find myself exclusively in this area of trading.

Within each of the above broad categories, there are a limitless number of styles, methods and systems to choose. It is indeed a minefield.

Many starting out go straight for the ‘day-trading’ category of trading and most don’t last long. If the fundamental information is not ‘their-bag’, then newbie’s should at least start with swing trading and taking the medium term view. It’s more stable than short-term trading because of the effect that news has on price and therefore the chart.

Swing trading can be profitable for the part-time trader; day trading, however, is only for the full-timers.

This is boring but its important

There are so many ways to trade it can take you years to figure out what is right for you. However, we can put all of them into three simple categories.

Firstly, there is day-trading. Self-explanatory. You are in a trade sometime during the day, and you are out of the trade before the day ends. Great fun. But few make a profit doing this.

Secondly, there is short-term trading (often referred to as swing trading). My preferred trading style. You follow the rhythm of the share price and try to catch the most lucrative part. You’re in for a few days to a few weeks. Using this style you may miss the big up, but you have a fair chance of missing the big down too!

Thirdly, longer term trading. What most of you have through your mutual fund investments and pension funds. Recall that over the more extended period, every 1 percent in charges results in you giving back to the fund some 20 percent of your final amount. So if your fund were worth £100,000 after 40 years of investing the average mutual fund would have cost you between £40,000 to £60,000. That’s a significant chunk. Few people realise this, and this is why mutual fund managers remain in the top echelons of earners.

The younger investor ought to choose a low-cost index tracker fund. It will win hands down over most mutual or managed funds.

The mature investor should always consider fixed index annuities – Read Tony Robbins, money master the game. It’s only 616 pages! Or take my word for it.

We should consider another problem with the mutual fund (and there are several more) is the equity crash that seems to come around now and again. If you were financially retiring in 2008, your long-term investment would be half of what you expected. If you had more than 15 years to retirement, your fund could recover if it were in US stocks. Most UK shares have not even yet recovered to the high of 2008.

Discuss with your independent financial advisor fixed index annuities such as (from Tony Robbins): Barclays Dynamic Balance Index (a mix of stocks and bonds) and Morgan Stanley Dynamic Allocation Index (a blend of 12 different sectors). Your IFA should find you UK index equivalents if you prefer.