Saturday, 6 July 2013
Positions based on closing prices:
EURUSD +80 pips @ 1.2830;
GBPUSD +243 pips @ 1.4882;
AUDUSD +82 pips @ 0.9060;
USDJPY +107 pips @ 101.17;
EURJPY +25 pips @ 129.75.
I have tiny real positions in GBP and UJ, the others are system trades.
I am using this break from live money trading primarily to improve my execution of trades. The data I have piled on from over a year of live system trading is that the system rules are very, very effective – if only I can execute the system! So I am drilling down deeper into each trade, the conditions around it, the reasons for poor execution or the circumstances for good execution, and learning lessons. I’m in no hurry to start trading serious money (by serious I mean serious for me; it will still be laughably small by the banks’ or big investor standards). The idea is that once I can trust myself to execute my system signals flawlessly, the money will pile up, there’s no doubt about that.
So what are the findings so far?
The best thing I’ve done for my trading is to stop reading all FX sites and blogs! I can’t emphasize this enough. Without the news and comments cluttering my mind, my reading of the charts has become so much better. It’s almost as if the charts speak to me directly. I can visualise the crowd behaviour behind the charts. For example, I didn’t even bother to see what the NFP number was – all I’m looking for is what does the market think of the number. So instead of being one of the thousands that make up the market crowd, I am standing apart from the crowd and observing the crowd behaviour. It becomes easy to see what the crowd will do next.
The more practical lessons are …
1. Picking the correct stop level is crucial. My philosophy for setting a stop level is that it should be the level at which the market is telling me very clearly that the trade is unambiguously wrong. That is one reason my initial stops are so wide. (The other reason is by keeping stops wide one doesn’t become a victim of random stop hunts in thin slow-moving markets.) With this view of the market, when a stop level is hit the logical thing to do is to flip into the opposite trade. If one direction has been clearly proven wrong it must mean that the market is headed in the other direction. I’ve found that flipping like this is mentally quite difficult, but has been the source of most of my big profits. An example is the GBP trades this week. Even though I suffered big slippage and a loss of -153 pips on the long trade, the flipped short trade has more than wiped out that loss and is generating profit. Note that my stops move up along the trendline as the trade progresses. So in reality my ‘wide’ stop is rarely if ever hit at the wide level. By the time the market makes up its mind and hits reverse, my stop has moved closer to my entry level.
2. Should I place orders in advance? I still don’t trust the market / brokers enough to leave orders in place. My past experience is that the market always targets such orders. I wonder if I am right, since my orders are so tiny by market standards, but it seems that in thin conditions such as early morning in Australia even a 1 lot order is targeted. Instead I place alerts near my stop levels and when the alert is triggered I monitor the market more closely, see if there has been any event to move the market and then decide if this is a thin-market stop hunt or a serious move backed by volume. This approach makes the stop level sort of discretionary, which is damaging to good execution. That’s the problem. My solution to this is a) when the market is expected to be thin, directionless, use market alerts instead of hard stops and b) when there is a significant event due, such as CB meetings, NFP, or such thing, use hard stops placed wide from the current levels. On a parallel track I am getting better at implementing stops & flipping a trade ruthlessly after getting an alert.
3. Lifestyle issues get in the way of flawless execution. By this I mean that sometimes the alerts / stops come at very inconvenient times, like between 4 – 7 am, or when I need to drive my kids somewhere, etc. Basically trading interferes with life. The standard answer to this problem is ‘Automate your trading’. There are two problems with that answer: it leaves one open to stop hunts and fake moves. Also, my system rules require me to judge the market visually from charts, and I have not found any software capable of replicating that kind of visual reading of the charts. Therefore, the only solution I can see at this point is to bear it and somehow work around it. It helps that when I am executing the system correctly there are only 2-3 trade max in each pair per week, and most of those trades happen in a bunch e.g. when the ECB meets, or when employment data is released, etc. So inconvenient trades are relatively infrequent. The longer term solution is to a) live in a friendly time-zone and b) get a good mobile charting solution. The best I’ve found so far is NetDania FX charts for the ipad/iphone, but I still prefer the charts on a laptop. The macbook air is almost as portable as an ipad and more usable.
I guess my blog becomes less interesting now since all I report are trades and an occasional opinion piece such as this. But my trading is getting better, which is the real aim of the blog for me.