Blog Archives » May 2006

Becoming Disciplined

I'm going to attempt to have another go at this FOREX trading stuff, though I'm going to try to only open a position when I can see a high probability. Some things that I am going to attempt are:

1. Trading with the trend
   
2. Waiting for confirmation of reversals

Basically I just want to try to be super disciplined and only make very high probability trades. Whether I can do that or not... I don't know :) though I'm sure I can learn a bit in the process.

I will update on my progress. 

A lot of activity in the USA

I've been sitting on some positions that I opened this morning that I was anticipating would gain by the USD losing more ground to the euro, all day (I'm in Aus) it's been pretty ordinary and I've lost a little bit. As soon as the US woke up on this monday morning they went crazy and very quickly I made a LOT of cash, I was making some stupid trades which happen to have worked and it makes for very nice earnings, though I would have lost a LOT of money if it went the other way which is suicide.

Here's a graph which shows the reaction when the US wakes up.

Heiken Ashi Chart

Since I've managed to get Metatrader running on Linux I've been experimenting a bit with chart displays.

One method of charting which I read about a little while back though haven't until now really had the opportunity to look at it in any great depth is Heiken Ashi, it makes trend spotting a bit easier as you can see in the 2 charts below, they're both EUR/USD hourly charts though visually it is a little bit easier to see the trend changing with the heiken ashi one. I don't use it all the time, though I've been finding it easier to skim through the different currency pairs with the heiken ashi chart and when I spot a trend that looks good I can then go into more analysis of it. To make it easy I've setup a couple of templates in metatrader which allows me to switch between heiken ashi and standard candlestick charts quickly.

Heiken Ashi Chart showing EUR/USD

Candlestick chart showing EUR/USD

I will do a bit more of an analysis of heiken ashi in the future. 

Current FOREX Data?

I've just found something that is a bit of a worry with Meta Trader... Upon logging in I've just been presented with daily data that is CLEARLY wrong, compare it to the charts in this post which I wrote just a little while ago (not more than 2 hours). Also if you look at the dates they're back in 1990!!!!

I understand that because I'm using a free demo account I don't get the 100% perfect data feed, though this data feed from Interbank FX is well a bit of a mystery as to why it's giving me data from 1990 then 2006.

The screengrab resizing cut off the current date for the latest candle which is todays date, all the rest are prehistoric candles. 

Aussie Dollar and Interest Rates

Let me start this post off by saying that for those that don't know, I'm an Aussie. 

Many many years ago (10 to be precise) I remember a friend bought a whole lot of USD (I think they were travellers cheques that he bought) when the aussie dollar was trading at just over 80 cents as he felt that there was no way the dollar could survive at that strength against the USD. Looking at a monthly chart it seems he was correct. I never did ask him how that investment went for him though I find it interesting the current situation that is occuring as we are nearing back up towards the 80 cent mark.

Today the government upped interest rates and I think that has only helped the dollar to keep climbing, I wonder how much further it will go before we experience a breakdown. I've opened a long position on the AUD/USD which I'm planning to hold as a longish position until the RSI gets up over 70, I've set my trailing stop at 50 pips which might be a little too close for fluctuations in a long term trade... though haven't been able to find any good info on how to manage the stop loss, except what I wrote about once before.

Monthly Chart of the Aussie Dollar

Learning About Candlestick Charting Patterns

Because I don't like to spend money I go to visit the local library to find reading materials, the latest book that I've borrowed is proving to be an absolute gem. The book is The Secret of Candlestick Charting, by Louise Bedford. It is quite strongly targetted at stock inveseting in Australia though I've managed to learn a quite a few patterns which appear to be applicable in FOREX as well.

Let me post a couple of charts which illustrate some candlestick patterns which I've found. 

This example shows a couple of different single line patterns, First in the dark blue is a shooting star, followed by a hanging man which is then followed by a drop of around  4 cents.

Then at the bottom of that downtrend is an inverted hammer which signalled an uptrend which carried for approximately 6 cents.

Here you can see a hammer which marked the reversal of a MASSIVE downtrend on the NZD/USD.

There are a heap more candlesticks that are in those charts, I've just pointed out a couple of the basics. I will write more later. 

I am a chicken

I know that I said I was going to hold my aussie dollar position long term, though well I'm a chicken and I got greedy, after it suffered for a day it has finally climbed again and well I was just too much of a chicken to not take the profit while it was there, so I cashed out for $300 or so. What makes me happy is that for once my balance is ABOVE where I started!!!

I was a little bit scared because of the book that I've been reading about candlestick charting, I saw a fairly good hanging man coming up and I didn't have the bank to wait for confirmation (which is probably rather stupid on my part), I think I'm also seeing some resistance just a little above where I went long before (at least on short term charts, see below).

I may open another small position on it to see if it actually does work medium term. 

Good System to Profiting?

It's actually a strategy that I thought about back when I first started experimenting with FOREX, and lately I've been starting to wonder if it's a good method of profiting from timezone differences. It revolves around the Americans doing a LOT of trading, so if you have a fair idea of where the market is going to go, you open your positions just before the American markets open and then when they open you get a nice big rise (assuming you thought they'd send it up).

It appears to have worked a bit the last few days that I've been looking.

I will analyse it for a bit longer and see if I can use it to my advantage. 

Right on Cue

I mentioned yesterday that there is a spike when the US wakes up, well right on cue today I made over $900 within an hour :D That is not to say that I opened my position at the right time, I had my money tied up from about this time yesterday so it was really $900 in a day, though just so happens that the profit all came within an hour.

I find it ironic that the rest of the world is more or less undecided about the value of the USD, though the american's appear to be selling it like crazy! 

I've closed my positions and will open some new ones when this spike falls back down (assuming it does).

Amazing what a couple of good trades can do

It's really interesting analysing my emotions when I have good trades and bad trades, I think that ideally I shouldn't be allowing emotion to come into it at all, just get on with the job of finding and making profitable trades.

When I've been making profit then I'm all happy and really keen on trading, the fact that the weekend comes around annoys me, You can probably also tell because when I'm interested I post quite regularly here. However when I've been unsuccessful and have been losing money then I'm ready to give it up and lose all interest in trading FOREX.

I think I definately need to work on the emotional side of things, so that at all times my thinking is clear and isn't clouded by the fact that my balance is negative. 

Finished reading the candlestick book

I've finished reading the book that I mentioned in this post about candlestick charting. Overall I got a lot of inspiration from it and really looking forward to putting some of the techniques mentioned into practice.

I was a little disapointed with the multi line patterns, not because of how they were presented more simply because they really seem to be just candle addition to create a single candle. I was rather expecting some kind of magic from them.

One thing which I forgot to mention in my previous post was the need for confirmation. When you see a candlestick pattern you need to have confirmation from the following candle(s). Your trading strategy will dictate how much confirmation you require, though it is a VERY valid thing to remember when looking at candlestick patterns. I may at some point outline some of the patterns and give the details of the confirmation required, though until then there is most likely a lot of information you can find online.

She also reinforced some things such as needing to use candlestick charting as only one component of your overall trading strategy and that as traders we need to get rid of all emotion in order to be successful... that last point I think will be the hardest and most likely the thing that makes the majority of people fail as traders.

A new indicator I've found

I've been very bad when it comes to writing about the various technical analysis indicators. The main reason has been that I've been so happy with RSI (yes I do have repetitive strain injury as well, though I'm not that impressed with it), and to a lesser extent CCI (I haven't been looking at it very much lately).

There is a new indicator that I've found which seems to be pretty cool and I will do an analysis of it in the near future (I first need to use it a bit more). The indicator is ADX, it is basically the average of the difference between two DMI (Directional Movement) lines, by looking at the ADX line you can instantly see how much it is trending, and by looking at the DMI lines you can see which way it's trending. From my initial impressions I've found that the DMI lines are actually pretty good for getting signals right near the start of a trend.

Easy Come, Easy Go... the story of my trading life

I was quite happy with the way I had been going since I started my "fresh start", and I had made a decent profit (I was up by 33% on my starting capital). The problem is that I think the EUR/USD might have reversed on it's uptren. Unfortunately I made the mistake of buying buying buying to try to decrease my losses on a rebound... The rebound never came and well I'm back where I started! I'm lucky, that my stop losses saved me from being even worse off.

Unfortunately I feel rather stupid as well, since I had my trailing stop for the original trade set to 50 pips though when I saw it coming close I didn't just leave it and get out of the rest of them that I had opened near the top, instead I cancelled the trailing stop and moved my stop losses down a bit! How stupid is that??? Oh well you learn something new everyday :)

I'm happy to say that on my Oanda account which I've had running a few trades which I've basically left and just gone in and moved the stops up a bit every day or two, the stops were triggered and I made a couple of grand on that one, so now I'm up by 8k on that account (it's a 100K account that I've been playing suicide with).

Chart of the EUR/USD reversal.

I'm not certain that it's a reversal (might just be a period of consolidation?), I've opened a short position, though I'm going to attempt to not be quite so stupid this time, the first sign of breakout and I'm (planning to be) outta there.

My Trading History #1

I thought it might be interesting for someone to see my trades so that they can see how much of a fool I am. I'll post some followups from time to time.

Another Technical Analysis Book to Read

I've finally managed to get my hands on another technical analysis book. Again I borrowed it from the library, though as it was in some far off out of the way library I got them to transfer it to my local library which took ages (I was hoping to have it last week).

The book that I've borrowed is "New Thinking in Technical Analysis: Trading Models from the Masters", by Rick Bensignor. It looks like it should be a beauty, with some of the biggest names writing chapters. Some of the contributors include (in the order they are in the book): 

• Linda Bradford Raschke
• Tom DeMark
• Peter Eliades
• Lawrence McMillan
• Robin Mesch
• John Murphy
• Steve Nison
• Steven Poser
• Bernie Schaeffer
• Courtney Smith
• Kenneth G. Tower
• Larry Williams (after reading the intro about him I'm quite looking forward to reading his chapter)

Hopefully it is a good read, most (except one idiot) of the reviews on Amazon are very positive.

I will see if I can learn anything from these writers and if I do then I'll post it back here :) 

Money Management

I've been getting stuck into the book that I recently borrowed and have to say that thus far the chapters that I've found most helpful/interesting have been "Using oscillators to predict trade opportunities" which is written by Tom DeMark andmore helpful from a basics point of view is the final chapter (I've been skipping chapters that sounded boring) titled "Controlling risk with money management techniques" which is written by Courtney Smith.

The chapter by Tom DeMark is interesting in that he introduces some new oscillators which he claims are more accurate than RSI and some of the other oscillators. I'm planning to write a meta trader indicator of some of his oscillators so that I can see if they actually are... On this note, I've been playing with some expert advisor coding in metatrader working with RSI and have to say that I'm running into troubles with RSI calling a low too quickly after a breakdown. The workaround to this is to set a lower stop loss which has problems in that losses are bigger than if the trade timing was just right. When I get around to implementing TDREI and some of his others then I can see if they do perform better.

The chapter which I've found most helpful thus far is the money management chapter. I've always thought about trading as trading in lots and once your lots are gone your finished. He writes about always working with percentages, if you're only ever betting 1% of your capital (at the time, not necessarily your starting capital) then it will take a very long time for you to be wiped out, however if you go in and bet 50% then you'll be wiped out very quickly. One of the issues here is that obviously your profits won't be as amazing as if you were calling it right and betting 100% of your capital.

In the expert advisors that I've been experimenting with I've switched to percentage based lot sizes, and instead of changing my lot sizes based on my recent performance (which most lot size methods I've seen use) I've just been trading 1% of my capital at the time, so as I lose money I bet less and less, until I end up having $10 in my account. I should also mention that a big part of this money management method is to also have your stop loss levels set at the risk level that you have defined in your strategy... I don't think I've done a very good job of explaining that last bit, probably because I need to understand it a little better myself and how to work this into my FOREX trading taking into account leverage etc.

Gold Massive Monthly Doji

I've been a bit slack with my FOREX trading ever since the USD started going sideways or gaining a little on the other currencies, I've been waiting for a good trend to establish itself before I take any new positions.

To keep myself occupied I've been really busy with work. I've also been doing a bit of looking at Heiken Ashi since there are a few people searching for it and finding my site, and well there isn't a whole lot of information about Heiken Ashi available online. I went looking for some good screengrabs that I can take for a Heiken Ashi article, and created a metatrader account with Alpari (the details for it are here) so that I can look at some stocks, futures and commodities (the demo doesn't show all, just a few select ones), I was looking at Gold and well it's been going up for the last several years and seems just recently it hit a top, when you switch to monthly candlesticks you can see a very very clear Doji, will be interesting to see the future price direction if that doji gains confirmation as a reversal signal.

Gold Monthly Chart

Gold Weekly Chart

Gold Daily Chart

Since it was Heiken Ashi that I was originally looking at here's the gold daily chart with Heiken Ashi candlesticks, it may not be the best example, though see how Heiken Ashi smooths out the trend so you get better indications of reversals?

Disciplined or Lazy?

With most things, if you sit around and do nothing it's considered lazy, though I think I'm being disciplined with my trading as I'm not making any trades until I see a high profit situation arise.

I've also been extremely busy with my work, which has kept me out of FOREX trading for the sake of trading trouble. 

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