Well it's 8 am and I'm semi-delirious. I've pulled an all night trading session and these stanzas have lodged in my brain. I must have them out, and then sleep.
Softly it bends... SNAP!
This resistance I've clung to
the floodgates open
Thursday, April 5, 2012
Wednesday, April 4, 2012
Trade of the Month: March #2 Short AUD/USD
It's not that often that you have a trade that is totally giftwrapped for you. The kind of trade with big blinking lights on it screaming "HEY! Over here buddy, FREE MONEY." This was one such trade. Not only was I able to get a high probability, low risk entry, but I was able to scale in safely several times as the trade progressed. Not only that, but between my first short trade and my last trade to cover, I captured over 90% of the pips from the move.
The Setup:
AUD/USD had been in a downward trend downward trend channel for nearly a month, moving reliably from top to bottom, with consistent intersections and subsequent rejects of price by the channel boundaries. Since the overall trend was down, I waited for price to hit the upper boundary so I could go short.
The Trade:
During this trade I was using the Amazing Crossover System to generate entries. Ordinarily I wait for the 5 Period EMA to cross over the 10 Period EMA but I will sometimes enter early if their are a confluence of factors supporting my entry direction and timing. In this case there were several factors favoring a price reversal to the short side:
The Setup:
AUD/USD had been in a downward trend downward trend channel for nearly a month, moving reliably from top to bottom, with consistent intersections and subsequent rejects of price by the channel boundaries. Since the overall trend was down, I waited for price to hit the upper boundary so I could go short.
 | ||
| AUD/USD Bearish Channel |
The Trade:
During this trade I was using the Amazing Crossover System to generate entries. Ordinarily I wait for the 5 Period EMA to cross over the 10 Period EMA but I will sometimes enter early if their are a confluence of factors supporting my entry direction and timing. In this case there were several factors favoring a price reversal to the short side:
- Price had effectively stalled at the trendline, just as it had before
- RSI was coming from overbought territory and moving toward the center line
- My MACD Indicator (which I use to generate early signals) had already crossed over
- The price bar right before my first entry was a Shooting Star pattern, a sign of bearish reversal.
 |
| 1 hr chart for AUD/USD showing entries and exits |
Monday, April 2, 2012
Trading Systems: The Amazing Crossover System
I have experimented with a few trading systems. Most of my ideas have come from exploring the forums on babypips.com and other Forex related sights. The Amazing Crossover System is no exception. It was borrowed from a thread on baby pips, with a few alterations to better suit my trading style. At it's core, the ACS is just a simple moving average crossover system (one of the most basic rule based trading systems) with the addition of a RSI indicator (That's Relative Strength Index) for trade confirmation. Despite it's simplicity, it has probably been my most effective system to date , owing largely to the fact that's it's rules are clearly defined and easy to follow.
The setup:
I use two moving averages for this system, both EMA's. (Exponential Moving Averages give more weight to recent price action when generating the average, so they follow price more closely). I will use slightly different settings based on which graphical layout I am using on my charting software, but it will be one of the following combination. A 5 Period EMA with either a 10 Period or 12 Period EMA as the 2nd average. I then add an RSI Indicator on the bottom, using 14 periods and average price as the setting. I have found this system to work best on chart time frames from 1 hr on up. I usually use it on 1hr and 2hr charts.
1. 5 Period EMA
2. 10 Period EMA
3. RSI Indicator set to last 14 periods
4. 1hr or 2hr Charts
Rules:
1. Identify trend direction on higher time frame. Only trade signals in the direction of the longer term trend.
2. Trade signal is generated when the 5 Period EMA crosses over the 10 Period EMA in the direction of the trend AND RSI crosses over the 50 (middle) line.
3. The signals are even better if the crossover is extremely rapid (the EMA's cross at steep angles) and the RSI comes from overbought or oversold territory before crossing the 50 line.
That's it!
Note: The use of RSI for confirmation is critical to the success of this method because it helps filter outs the fake-outs often generated by this type of system where price my briefly sell of (triggering the crossover) and then immediately push higher. If you use RSI enough, you will notice that while price will frequently come from oversold or overbought levels and reflect off the 50 level back in the direction it came from, it will very rarely CROSS the 50 line without making it to the opposite side.
Here's an example of this system in action...
The AUD/USD was in a multi-day down trend indicated by the grey trendline connecting the peaks. As such, I was only looking for trades in the short direction. Indicated for each trade are the entries and exits confirmed by a crossover of the moving averages.
Things to Notice:
The setup:
I use two moving averages for this system, both EMA's. (Exponential Moving Averages give more weight to recent price action when generating the average, so they follow price more closely). I will use slightly different settings based on which graphical layout I am using on my charting software, but it will be one of the following combination. A 5 Period EMA with either a 10 Period or 12 Period EMA as the 2nd average. I then add an RSI Indicator on the bottom, using 14 periods and average price as the setting. I have found this system to work best on chart time frames from 1 hr on up. I usually use it on 1hr and 2hr charts.
1. 5 Period EMA
2. 10 Period EMA
3. RSI Indicator set to last 14 periods
4. 1hr or 2hr Charts
Rules:
1. Identify trend direction on higher time frame. Only trade signals in the direction of the longer term trend.
2. Trade signal is generated when the 5 Period EMA crosses over the 10 Period EMA in the direction of the trend AND RSI crosses over the 50 (middle) line.
3. The signals are even better if the crossover is extremely rapid (the EMA's cross at steep angles) and the RSI comes from overbought or oversold territory before crossing the 50 line.
That's it!
Note: The use of RSI for confirmation is critical to the success of this method because it helps filter outs the fake-outs often generated by this type of system where price my briefly sell of (triggering the crossover) and then immediately push higher. If you use RSI enough, you will notice that while price will frequently come from oversold or overbought levels and reflect off the 50 level back in the direction it came from, it will very rarely CROSS the 50 line without making it to the opposite side.
Here's an example of this system in action...
The AUD/USD was in a multi-day down trend indicated by the grey trendline connecting the peaks. As such, I was only looking for trades in the short direction. Indicated for each trade are the entries and exits confirmed by a crossover of the moving averages.
Things to Notice:
- The fake out we avoided before taking trade #3 (Crossover without RSI confirmation)
- In trade #3, the MA's touch twice on the way down but do not crossover, so trade remains in tact.
- There is no trade at the short term peak between trades #2 and #3 because RSI reflects off the 50 level instead of crossing it from overbought territory.
How to Choose a Forex Broker
So you've decided to learn to trade foreign exchange. Before you can make your first million dollars, you're going to have to choose a broker. This is one of the most important decisions in trading process and one that I suspect is often overlooked. Nearly all first time traders looking for a broker obsess about spread, Spread, SPREAD. Let me set the record straight. While the cost of the spread has an effect on your bottom line at the end of the month, it is nowhere near the most important factor when choosing a broker. Beyond this, all spreads are not created equal and cannot be compared apples to apples. I spent nearly two months researching brokers before I made my first deposit and I'll share what I learned to save you some time.
The four most important considerations when choosing a Forex Broker (in order) are...
1. Reputation
Until just recently, the retail foreign exchange brokers have been largely unregulated. It's been more or less like the wild west, and their have been literally dozens of start-up Forex brokers that have turned out to be Ponzi schemes, designed only to siphon off customer assets. When choosing a broker, make sure you pick one with an existing reputation, that has been in business for at least 4 years, and has generally positive customer reviews. The best website for checking Forex broker reviews is Forex Peace Army.You want a broker that has a good record of prompt and consistent payouts of profits from winning accounts, and good customer support in case problems pop up.
2. Price Dealing Method
There are two main ways Forex brokers allow you to trade. The first is known as the Dealing Desk method where the broker essentially acts as the market maker, taking the opposite side of every trade you make. The problem with this method, is that the broker has a vested interest in you losing money. After all, in a zero sum game, every dollar you make is a dollar out of the broker's pocket. Now granted, as a market maker the broker still profits from the spread and in the long run this can lead to substantial profitability, but the conflict of interest generated by the Dealing Desk method has historically led to some problems. Market Maker brokers have been known to do the following:
STP Brokers make their profit from marking up the spread on a currency pair. For example, if the true Interbank spread on the EUR/USD is currently 1 pip, they might show you a spread of 2 pips in your trading platform. The 1 pip difference between the price you see and the actual price is the broker's profit.
ECN Brokers have a more transparent commission method. The price they quote you will be very nearly equal to the current Interbank spread, but they will charge a fixed commission per each amount of a currency traded on both sides of the trade (buy and sell). For example, an ECN broker may show a spread of 1 pip on the EUR/USD and charge a commission of $5 per $100,000 traded. Since 1 Contract of EUR/USD is 100,000 Euros, roughly equal to $130,000 USD, you would be charged a roundtrip commission of $13. This would actually be slightly more expensive than making the same trade at the STP broker mentioned in the earlier example, because 1 pip of EUR/USD is worth $10 per contract. This is not to say STP brokers are cheaper than ECN brokers or vice versa, it all comes down to the commission price and the spread markup of each.
Bottom line, you want to trade using an STP or ECN broker. Do not open an account with a broker that uses the dealing desk method.
3. Customer Support/ Platform Stability
This is one of the most overlooked aspects when it comes to choosing a broker, but extremely important. What good are tight spreads if your trading platform crashes when you have a large position on. It may end up costing you 100 times the price of the spread. Customer support is equally important. You want to make certain that you can talk to a human being when you have technical issues or account issues, and need them instantly resolved. All of the top tier brokers have live 24 hr phone support and most have live chat support to help with any issues. ForexPeaceArmy.Com is a good resource to for reviews.
4. The Spread
The spread is the price you pay for opening each position and the size of it will have an impact on your end of month results. The shorty time frame you trade on, the more important the cost of the spread is. If you trade using daily charts, the price of the spread will have an almost negligible effect on your profits as each trade will be netting or losing hundreds of pips on average, so what's 1 pip more or less. If on the other hand you are trading extremely short time frames like 1 hr, 15 minute or 5 minute (good luck) charts, the cost of the spread may be much more significant. A good source for comparing broker spreads is FXIntel. They have live spreads during Forex market hours for many of the brokers available to U.S. clients.
Some things to keep in mind.
If you sign up for your FX broker through certain websites, you can get a portion of the spread you pay rebated to you each month. It can be a nice boost on profitability, especially on small accounts, or can keep you in the game after a losing month. Just be careful not to over-trade in order to increase your rebate. There are several websites that offer this service, you can check their reviews online. The one I use for my own account is called Cash Back Forex USA.
Good luck in your search for the perfect broker. Let me know if you find it!
The four most important considerations when choosing a Forex Broker (in order) are...
- Track Record, Reputation, and Integrity
- Price Dealing Method (Market Maker or ECN/STP?)
- Customer Support and Platform Stability
- Spread and Pricing (a distant 4th)
1. Reputation
Until just recently, the retail foreign exchange brokers have been largely unregulated. It's been more or less like the wild west, and their have been literally dozens of start-up Forex brokers that have turned out to be Ponzi schemes, designed only to siphon off customer assets. When choosing a broker, make sure you pick one with an existing reputation, that has been in business for at least 4 years, and has generally positive customer reviews. The best website for checking Forex broker reviews is Forex Peace Army.You want a broker that has a good record of prompt and consistent payouts of profits from winning accounts, and good customer support in case problems pop up.
2. Price Dealing Method
There are two main ways Forex brokers allow you to trade. The first is known as the Dealing Desk method where the broker essentially acts as the market maker, taking the opposite side of every trade you make. The problem with this method, is that the broker has a vested interest in you losing money. After all, in a zero sum game, every dollar you make is a dollar out of the broker's pocket. Now granted, as a market maker the broker still profits from the spread and in the long run this can lead to substantial profitability, but the conflict of interest generated by the Dealing Desk method has historically led to some problems. Market Maker brokers have been known to do the following:
- Fill market orders at a price other than where it was executed
- Charge negative slippage but never credit positive slippage to the trader
- Quote different prices to different traders at the same time in the same market
- Artificially move the market to hit stop loss levels of their own clients
STP Brokers make their profit from marking up the spread on a currency pair. For example, if the true Interbank spread on the EUR/USD is currently 1 pip, they might show you a spread of 2 pips in your trading platform. The 1 pip difference between the price you see and the actual price is the broker's profit.
ECN Brokers have a more transparent commission method. The price they quote you will be very nearly equal to the current Interbank spread, but they will charge a fixed commission per each amount of a currency traded on both sides of the trade (buy and sell). For example, an ECN broker may show a spread of 1 pip on the EUR/USD and charge a commission of $5 per $100,000 traded. Since 1 Contract of EUR/USD is 100,000 Euros, roughly equal to $130,000 USD, you would be charged a roundtrip commission of $13. This would actually be slightly more expensive than making the same trade at the STP broker mentioned in the earlier example, because 1 pip of EUR/USD is worth $10 per contract. This is not to say STP brokers are cheaper than ECN brokers or vice versa, it all comes down to the commission price and the spread markup of each.
Bottom line, you want to trade using an STP or ECN broker. Do not open an account with a broker that uses the dealing desk method.
3. Customer Support/ Platform Stability
This is one of the most overlooked aspects when it comes to choosing a broker, but extremely important. What good are tight spreads if your trading platform crashes when you have a large position on. It may end up costing you 100 times the price of the spread. Customer support is equally important. You want to make certain that you can talk to a human being when you have technical issues or account issues, and need them instantly resolved. All of the top tier brokers have live 24 hr phone support and most have live chat support to help with any issues. ForexPeaceArmy.Com is a good resource to for reviews.
4. The Spread
The spread is the price you pay for opening each position and the size of it will have an impact on your end of month results. The shorty time frame you trade on, the more important the cost of the spread is. If you trade using daily charts, the price of the spread will have an almost negligible effect on your profits as each trade will be netting or losing hundreds of pips on average, so what's 1 pip more or less. If on the other hand you are trading extremely short time frames like 1 hr, 15 minute or 5 minute (good luck) charts, the cost of the spread may be much more significant. A good source for comparing broker spreads is FXIntel. They have live spreads during Forex market hours for many of the brokers available to U.S. clients.
Some things to keep in mind.
- Don't be fooled by fixed spreads. If you find a broker offering fixed (non variable) spreads, they are a market maker and must be avoided. Liquidity changes in the Interbank market based on time of day, and as a result the spread will widen or shrink. If you're broker is passing accurate spreads on to you, they will change based on liquidity as well. If you want the tightest spreads, trade between 3am and 3pm EST when the FX markets see maximum volume.
- All spreads are not created equal. Even if you have a broker with good spreads, if you constantly are receiving slippage on your orders, your costs are going to increase beyond the spread. If you are getting slipped constantly, switch brokers.
If you sign up for your FX broker through certain websites, you can get a portion of the spread you pay rebated to you each month. It can be a nice boost on profitability, especially on small accounts, or can keep you in the game after a losing month. Just be careful not to over-trade in order to increase your rebate. There are several websites that offer this service, you can check their reviews online. The one I use for my own account is called Cash Back Forex USA.
Good luck in your search for the perfect broker. Let me know if you find it!
Saturday, March 24, 2012
Trades of the Month March #1
Sometimes you get you make a trade that so clearly demonstrates the power of technical analysis as a trading tool. This long trade of the USD/NOK (Norwegion Krone) was one such trade. The technical price action of the currency pair effectively predicted the eventual interest rate change days before it's announcement. In the weeks prior, the USD/NOK pair had broken out of a tight range, and with someone large gyrations had found every higher support (the most recent major weekly support level is the red dashed line on the chart).
The Sequence of Events:
The increasingly high short term support levels leading up to the central bank decision, clearly show that the smart money (large banks and their trading desks) anticipated the interest rate change. As a result, a portion of this expectation was already built into the price. When this is the case, a currency pair will often move dramatically just after news is announced, but will then retrace much of the move over the following days as the anticipation of the announcement had already been priced in. Note on the chart that over the following days, 100% percent of the sharp upward move was retraced, almost to the pip. Trading immediately following news announcements hasn't been part of my strategy at all, in the future I may experiment with fading news announcements and try to capture some profits on the retracement.
The Sequence of Events:
- 2/26 - 3/1. The pair fails to break through major support and in doing so forms an inverse head an shoulders pattern (a strong sign of bullish reversal.
- 3/5-3/8. The pair sells of strongly but fails to reach the long term support level. It immediately rebounds
- 3/12 -3/13. The pair finds higher support and breaks sharply up. This is where I entered expecting a short term breakout and start of the next leg of the upward trend.
- 3/13 - Then Norwegian central bank announces an interest rate cut of 0.25%, which over time will decrease demand for the Krone, causing the USD$ to strengthen against it in relative terms. The result is an almost immediate rocketing up in price. I used a 2hr bar chart for the sake of context, but the majority of that huge bar's movement took place in about 5 minutes. I exited my positions in stages on the way up and just after the peak.
The increasingly high short term support levels leading up to the central bank decision, clearly show that the smart money (large banks and their trading desks) anticipated the interest rate change. As a result, a portion of this expectation was already built into the price. When this is the case, a currency pair will often move dramatically just after news is announced, but will then retrace much of the move over the following days as the anticipation of the announcement had already been priced in. Note on the chart that over the following days, 100% percent of the sharp upward move was retraced, almost to the pip. Trading immediately following news announcements hasn't been part of my strategy at all, in the future I may experiment with fading news announcements and try to capture some profits on the retracement.
Thursday, March 1, 2012
The road is bumpy, but the grass is green
When I finally committed real money to a Forex broker, I did so with the full knowledge that I would lose my first deposit. As such, I deposited a relatively small sum. Do I want to lose money? Of course not, but I needed to learn the flow of the FX market and test the limits of my current techniques of analysis in this setting. To do this I needed to trade a sum of money small enough to be long term unimportant, but large enough that I would care about losing. This is why paper trading is a poor substitute for real trading, you just don't get the emotional effect of watching your hard won equity disappear. Even though I dove in headfirst willing to lose the entire balance of my account as the price of education, I honestly half expected to win right off the bat. Did I receive a rude awakening! The speed at which price can move and the severity of the short term whipsawing in the market took me completely off guard. Not only this, but I didn't fully appreciate going in the added complication of increased leverage. Trading stocks, I never had better than 2:1 margin, so I could happily commit my full margin to my positions without any real danger of sustaining a massive loss (at least not in the short term). FX is completely different. At the start, I was using my full margin to attempt to maximize my gains, only to find that I was getting stopped out of positions rather quickly by a quick down swing and then forced to watch price march off in my previously anticipated direction. The first month I lost 63% of my deposit. The remainder was gone in the next 4 months. The number of false breakouts and show reversals in the FX market completely blindsided me coming from an equities background. Not only this, but I totally underestimated the effect of leverage. At 30:1 leverage (standard for he EUR/USD Pair), at $.01 change in exchange rates can wipe out 1/3 of your account, and a $.03 price move could take all your equity. Given that the pair moves around $.01 per day on average, I needed a new approach.
I looked back on my trading records and discovered that in general, my directional analysis was pretty good, had I been trading smaller lots I would probably have shown a profit, even at the start. The primary cause of my early failure was risk management. At this point, summer was starting (peak season for poker) and I largely abstained from trading over the next 6 or 8 months while I focused on my poker career. In the interim, I committed myself to devising a system of risk management to maximize gains while minimizing drawdowns and the possibility of an equity crippling loss. One of the books I read over the course of my trading education (I cannot for the life of me remember which one) cited a study that analyzed the level of loss in an account which, if sustained, made it more likely for a trader to lose the remainder than to recover to his previous level. This inflection point was found to be right around 35% for high leverage markets. (Options, FX, Futures). My goal going forward is to never sustain level of loss (calculated only from end of month or start of month), and to have increasingly low draw-downs as my equity grows.
This blog is intended to be a journal of my successes and setbacks, as well as a forum in which to share the hard won knowledge gained in my quest to become a professional trader. The real journey starts now.
I looked back on my trading records and discovered that in general, my directional analysis was pretty good, had I been trading smaller lots I would probably have shown a profit, even at the start. The primary cause of my early failure was risk management. At this point, summer was starting (peak season for poker) and I largely abstained from trading over the next 6 or 8 months while I focused on my poker career. In the interim, I committed myself to devising a system of risk management to maximize gains while minimizing drawdowns and the possibility of an equity crippling loss. One of the books I read over the course of my trading education (I cannot for the life of me remember which one) cited a study that analyzed the level of loss in an account which, if sustained, made it more likely for a trader to lose the remainder than to recover to his previous level. This inflection point was found to be right around 35% for high leverage markets. (Options, FX, Futures). My goal going forward is to never sustain level of loss (calculated only from end of month or start of month), and to have increasingly low draw-downs as my equity grows.
This blog is intended to be a journal of my successes and setbacks, as well as a forum in which to share the hard won knowledge gained in my quest to become a professional trader. The real journey starts now.
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