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.
Monday, December 20, 2010
How did I get here?
I've always taken an "off the beaten path" approach when it comes to making money. When I was a young kid, I used to pick violets in the woods behind my house, combine them into teeny little bouquets, take them door to door in my red wagon and sell them. In high school, I occasionally dealt $1 a hand blackjack for other students, but stopped when one guy couldn't pay the $40 he owed, and offered to pay me in cologne instead. Besides, having an automatic edge by being the dealer didn't really appeal to me. Where's the skill, where's the challenge? In college, I stayed in beer money with website referrals via banner and. And then I discovered poker... I played low stakes holdem at a local indian casino earning about $100 a session (which in college is great money) and eventually moved to internet poker with the party poker boom. The weekend after I graduated college, I went to Atlantic City with friends for a few days. I played the first two live poker tournaments of my life, winning the first and finishing second in the next. I called my parents to share my accomplishment, and I distinctly remember my dad joking "don't make it a career." Little did he know...
Within around four years, I had worked my self from small stakes no limit-holdem all the way up to regularly playing in the biggest legal No-Limit Holdem game on the East Coast ($5000 was the minimum buyin, and one's entire stack was at risk in every single hand). Over the course of this half decade, and my 10,000 hours of experience (thanks Malcom Gladwell) I developed a number of skills that helped me beat the odds and my opponents, Namely: Logic and Reasoning, Recall (remembering how my opponents played different hands in different situations), Pattern Recognition, Psychology, Risk Management, and the Important of tailoring your tactics to different situations. These skills, while extremely useful in poker, are also highly applicable to my #1 lifelong interest (besides girls): Financial Markets and the art of trading.
There are three vivid recollections from my childhood that I think about often, the first two are: a six overtime loss in a youth hockey tournament final and the time I stole $50 from my dad's wallet (In my defense, I thought it was a $5). From the first I learned respect for my competitors, to constantly push myself to improve, and to bounce back physically and mentally from a tough loss (all traits that have served me well in my poker career). From the second I learned the importance of trust, integrity, and honesty, values that I apply constantly to my personal and professional life. The third memory is of the time when my dad introduced me to the stock market and the concept of investing. I don't remember my exact age, but I was pretty young, somewhere between 9 and 11 I think. He had me take part of my savings (about $25 from my life savings of $100 or so) and purchase from him a share of stock in a company in which he held shares. As I write this, it's somewhat amazing to me that I still remember the name of the company, Marion Merrell Dow (ticker symbol MMD If I recall), A pharmaceutical company that was ultimately purchased by a conglomerate in 1996. He taught me how to read stock quotes and I would check the wall street journal nearly every day to see how my Investment was doing. After some ups and downs, I ultimately sold out (at my father's suggestion) for around a $5 loss. Another important lesson learned, never rely on the investment advice of others.
I opened my first brokerage account my sophomore year of college, funded largely by poker winnings, starting with the most basic of investment of philosophies, the time honored combination of p/e ratios and throwing knives at the wall street journal while blindfolded. Needless to say I made 30% my first year as a trader (or should I say investor). Despite my early (and obviously well deserved) success, I made it a priority to absorb as much investing knowledge as possible. By the end of my senior year I had waded through all the valuation ratio's and measures that fundamentalists hold dear, and while it gave me a feeling of comfort wrapped inside my little security blanket of investment fundamentals when I purchased companies trading at relative discounts, these principles of valuation did little to explain the sometimes massive daily, weekly and monthly price swings of companies who's financial prospects had not measurably changed in the interim.
And so it was that I stumbled accidentally in to the realm of technical analysis, and boy did I like it there. It was like a breath of fresh air, a completely new way of looking at the markets and why prices moved the way they did. While sometimes mystical in it's applications (think fibonacci) and cultish in it's practitioners devotion, I always appreciated the logic behind the application. Technical analysis treats price much like the laws of physics. Objects in motion (read Price) tend to stay in motion unless acted upon by an external force. This was quite contrary to the oft repeated mantra buy low, sell high. Technical Analysists (or at least the trend following subset) would say buy high, sell higher. It sparked an immediate fascination for me, because it is based on the belief that price is everything. The why is not important, all you need to focus is on is what has happened, what may happen, when might it happen, and what are we going to do about it. The concept of support and resistance levels had the most immediate impact of my trading. Finally, there was a rational explanation for why prices moved up and down, and where they might decide to turn. Support and Resistance levels are simply the psychological value levels of an asset at which supply tend to overwhelm demand or vice versa. Simple, yet elegant.
Unlike fundamental analysis, technical analysis makes an attempt to quantify and incorporate human psychology into the markets, something that I as a poker player appreciated immensely.
Anyway... long story long I suppose, 10 years after my first trade, I've decided to take a shot at the foreign exchange market, the largest market in the world (over 4 Trillion with a T Dollars in daily volume). The main reasons I have for learning to trade this market are:
1). It's Massive. I This is the number one attraction. I have a long term goal of being a professional trader and money manager, and I like the fact that the liquidity is so deep and my capital so insignificant compared to the daily turnover that I could trade a $1 million or $10 Million dollar account with virtually the same approach as a $1000 account (should I ever make it to that level). Bottom line, FX trading is more scalable than any other market, meaning it diminishing returns kick in alot later than in equity trading.
2) The high leverage. This is probably the number one selling point of the FX market to small retail traders and the primary reason why the attrition rate is so high (reportedly over 95% which is approximately the same as the failure rate for poker players). Going in I was aware that the market makers want a constant stream of small traders to chew up and spit out and the risks of high margin are substantial, but if you happen to make it to the 5%, the rewards are even greater.
3) The diverse objectives of market participants. Unlike the stock market, there are huge amounts of capital traded in the spot FX market without the explicit objective of profit. Multinational Corporations, export/importers and other businesses utilize the FX market daily to hedge currency risk, rather than trade in expectation of gain. Beyond this, entire countries (through their central banks) trade astounding sums in attempts to realign their exchange rates (Japan being one of the most frequent).
4) The applicability of Technical Analysis. Somewhat ironically, because that the FX market is at it's core driving by interest rates and long term capital flows, the trends that exist in the market are some of the most persistent and conducive to the use of technical methods for prediction and analysis. (My bread and butter)
Okay enough chitter chatter, let's get TRADING!
Within around four years, I had worked my self from small stakes no limit-holdem all the way up to regularly playing in the biggest legal No-Limit Holdem game on the East Coast ($5000 was the minimum buyin, and one's entire stack was at risk in every single hand). Over the course of this half decade, and my 10,000 hours of experience (thanks Malcom Gladwell) I developed a number of skills that helped me beat the odds and my opponents, Namely: Logic and Reasoning, Recall (remembering how my opponents played different hands in different situations), Pattern Recognition, Psychology, Risk Management, and the Important of tailoring your tactics to different situations. These skills, while extremely useful in poker, are also highly applicable to my #1 lifelong interest (besides girls): Financial Markets and the art of trading.
There are three vivid recollections from my childhood that I think about often, the first two are: a six overtime loss in a youth hockey tournament final and the time I stole $50 from my dad's wallet (In my defense, I thought it was a $5). From the first I learned respect for my competitors, to constantly push myself to improve, and to bounce back physically and mentally from a tough loss (all traits that have served me well in my poker career). From the second I learned the importance of trust, integrity, and honesty, values that I apply constantly to my personal and professional life. The third memory is of the time when my dad introduced me to the stock market and the concept of investing. I don't remember my exact age, but I was pretty young, somewhere between 9 and 11 I think. He had me take part of my savings (about $25 from my life savings of $100 or so) and purchase from him a share of stock in a company in which he held shares. As I write this, it's somewhat amazing to me that I still remember the name of the company, Marion Merrell Dow (ticker symbol MMD If I recall), A pharmaceutical company that was ultimately purchased by a conglomerate in 1996. He taught me how to read stock quotes and I would check the wall street journal nearly every day to see how my Investment was doing. After some ups and downs, I ultimately sold out (at my father's suggestion) for around a $5 loss. Another important lesson learned, never rely on the investment advice of others.
I opened my first brokerage account my sophomore year of college, funded largely by poker winnings, starting with the most basic of investment of philosophies, the time honored combination of p/e ratios and throwing knives at the wall street journal while blindfolded. Needless to say I made 30% my first year as a trader (or should I say investor). Despite my early (and obviously well deserved) success, I made it a priority to absorb as much investing knowledge as possible. By the end of my senior year I had waded through all the valuation ratio's and measures that fundamentalists hold dear, and while it gave me a feeling of comfort wrapped inside my little security blanket of investment fundamentals when I purchased companies trading at relative discounts, these principles of valuation did little to explain the sometimes massive daily, weekly and monthly price swings of companies who's financial prospects had not measurably changed in the interim.
And so it was that I stumbled accidentally in to the realm of technical analysis, and boy did I like it there. It was like a breath of fresh air, a completely new way of looking at the markets and why prices moved the way they did. While sometimes mystical in it's applications (think fibonacci) and cultish in it's practitioners devotion, I always appreciated the logic behind the application. Technical analysis treats price much like the laws of physics. Objects in motion (read Price) tend to stay in motion unless acted upon by an external force. This was quite contrary to the oft repeated mantra buy low, sell high. Technical Analysists (or at least the trend following subset) would say buy high, sell higher. It sparked an immediate fascination for me, because it is based on the belief that price is everything. The why is not important, all you need to focus is on is what has happened, what may happen, when might it happen, and what are we going to do about it. The concept of support and resistance levels had the most immediate impact of my trading. Finally, there was a rational explanation for why prices moved up and down, and where they might decide to turn. Support and Resistance levels are simply the psychological value levels of an asset at which supply tend to overwhelm demand or vice versa. Simple, yet elegant.
Unlike fundamental analysis, technical analysis makes an attempt to quantify and incorporate human psychology into the markets, something that I as a poker player appreciated immensely.
Anyway... long story long I suppose, 10 years after my first trade, I've decided to take a shot at the foreign exchange market, the largest market in the world (over 4 Trillion with a T Dollars in daily volume). The main reasons I have for learning to trade this market are:
1). It's Massive. I This is the number one attraction. I have a long term goal of being a professional trader and money manager, and I like the fact that the liquidity is so deep and my capital so insignificant compared to the daily turnover that I could trade a $1 million or $10 Million dollar account with virtually the same approach as a $1000 account (should I ever make it to that level). Bottom line, FX trading is more scalable than any other market, meaning it diminishing returns kick in alot later than in equity trading.
2) The high leverage. This is probably the number one selling point of the FX market to small retail traders and the primary reason why the attrition rate is so high (reportedly over 95% which is approximately the same as the failure rate for poker players). Going in I was aware that the market makers want a constant stream of small traders to chew up and spit out and the risks of high margin are substantial, but if you happen to make it to the 5%, the rewards are even greater.
3) The diverse objectives of market participants. Unlike the stock market, there are huge amounts of capital traded in the spot FX market without the explicit objective of profit. Multinational Corporations, export/importers and other businesses utilize the FX market daily to hedge currency risk, rather than trade in expectation of gain. Beyond this, entire countries (through their central banks) trade astounding sums in attempts to realign their exchange rates (Japan being one of the most frequent).
4) The applicability of Technical Analysis. Somewhat ironically, because that the FX market is at it's core driving by interest rates and long term capital flows, the trends that exist in the market are some of the most persistent and conducive to the use of technical methods for prediction and analysis. (My bread and butter)
Okay enough chitter chatter, let's get TRADING!
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