Friday, February 24, 2006

How do you start your day?

Well the first thing I do, when I switch on my displays is trying to get an overview, looking at longer term charts of the currencies I follow.
Currencies trade 24h a day and living in Germany I usually miss the asian session. Contrary to the Forex market the Globex traded currency futures are all denominated against the US Dollar, making it easy for the trader to analyze the night action. My preliminary assumption is, that it's the World against the USD or the USD against the world, meaning all charts show an uptrend or all charts show a downtrend, if the USD is rising.
If I see something different, I know the trading day might become difficult, as there are cross currents, as traders liquidate or build positions in currency pairs outside of the USD world. Something we can see on the chart below. The Yen (JPY) is up and trading near the highs of the day, while the Euro and the British Pound (GBP) are flat with a downward bias. Of the latter two the GBP is trading stronger than the Euro as it held most of yesterdays gains, while the Euro is back into it's old range and I expect it to test the 1.1900-1.1880 area.
I also have the electronically traded crude Oil on the chart (QM), as both the Australian Dollar as well as the Canadian Dollar are affected by commodity prices, especially by the Oil and Gold prices. So if Oil goes up, I expect to see CAD up or trade with an upward bias in the european session, if it remained flat during the asian session.

Thursday, February 16, 2006

Euro/USD analysis

There is a lot of speculation, that the EuroUSD is headed lower. But my 240min chart paint's a slightly different picture.

We had a range breakout to 1.2359, followed by EuroUSD falling back into the 1.2200-1.2050 range. A testing of this range and EuroUSD forming a stairstep pattern down with 3 lower Lows and Lower Highs. The 3rd LL saw an inverted Head&Shoulders pattern forming and failing.
Now EuroUSD made a 4th LL and is again forming a possible inverted H&S pattern with strong support at the 1.1850 level, which marked the range low a few times in 2005.
Yesterdays spike after the capital inflows news ran directly into resistance, was rejected and EuroUSD headed back to the lows on Bernanke's speech to congress.

But EuroUSD made no new low. In fact it made a higher low, forming a possible right shoulder. My new BB crossover indicator shows support coming into EuroUSD at these levels even when the overall trend still seems to point straight down.
Therefore I think a EuroUSD long today with a Stop around 1.1870 / 1.1850 depending on the entry might be a good tradeplan.

Wednesday, February 08, 2006

Trade 1 or 10 contracts

Just recently I followed a link advertising trading coaching. Well, one of the suggestions I saw there was, that you should not start trading without enough capital in your account. And the suggested size of the account was 100,000$ to pay for datafeed, losses, coaching service and other expenses, you will incur in your trading career from month to month. On the other hand they promised to teach you to make something between 500$ to 2,000$ a day.

  • Yes, it is true, that you can't make money without money
  • Yes, it is true, that you can't trade emotionless, if you stay with the back to a cliff and you know, that the next loss, the next trade might mean, that you are broke.
  • But, it is also true, that the easiest way in trading to end with a small fortune is to start with a big one.
  • And it is also true, that you will make the same mistakes, whether you trade 1 or 10 contracts, whether you trade 200 or 2000 shares.

Do you really think you can trade 10 contracts, if you can't trade 1 or 2 contracts successfully?

Somewhere I read, that you need to earn the right to trade more contracts. And that is exactly true. Increase size, if you can successfully trade 1 contract, if your account has grown from 3,000$ to 6,000$. A simple calculation tells you, that this 100% increase in your account is "just" 20 days or one trading month away, if you make net 150$ profit a day.


150$ is sure something you can make trading 1 contract only and to restrain yourself from trading more until you know you can trade just makes sure you will survive the learning curve and not end as one of the cast aways.

Tuesday, February 07, 2006

The Safety Net

Let's start neither with the Tradeplan nor Money Management. Both are essential for a trader, but of even more importance for a struggling trader is the Safety Net.
You can't trade without sufficient funds in your account. As a trader, especially as a greenhorn trader you will suffer losses. And at times you will not be able to control these losses, you will let them go out of hand. Reading about Market Wizards you will notice, that most admit to have gone broke at least once, but most usually a few times before they were able to make it.
My all time favorite is still Reminiscences of a Stock Operator from Edwin Levevre and if you haven't read one book about the markets, that's the one book you have to read. It's the classic trading book and it's lessons are as valid today as they were valid 100 years ago.
All these traders first made thousands from the market and then lost them all again. But they had made sure one thing: Usually they had some cash aside to be able to start again.

Treat trading as any other profession. Learning to trade will cost you tuition. The only difference to a regular tuition is, that you can fix the amount you are willing to pay within certain ranges. Accept this fact and prepare for it in advance.

Say you have a 10,000$ account to start trading. I know that's not a lot, on the other hand, you can buy really nice things for 10,000$ so it's sure not nothing. You can't start daytrading stocks with 10,000$ but you can start trading futures with this amount. Actually margin rules allow you to trade with a lot less due to the high leverage futures give you.

Taking this fact into account let's build our safety net with our 10,000$ account. IB (Interactive Brokers) with whom I'm not afiliated other than that I trade with them for 4 or 5 years now, allows you to trade futures if your account has at least a value of 2,000$.

So, if you intend to embark on the road to trading success, split your 10,000$ in two accounts. One account will get funded with 3,000$ the other with 7,000$. Your 7,000$ account will sit just there, earn interest and be your Safety Net. And you will trade with your 3,000$ account only.

Of course you intend to build your 3,000$ account and if everythings run smoothly, you will not need your Safety Net. But in case the S**t hits the fan and you let your account dive below 2,000$ and to make matters worse, not you but IB pulls the trigger and get's you out of the market, because your account became undermargined, you have your Safety Net ready and waiting.

Take a deep breath, make a strike on the I have gone broke board, take a day or two off, think about the reasons why you were not able to act and save your account from going under, and then submit funds from your Safety Net account to your trading account, stand up and continue your education.

I can guarantee you, that after going through this experience once or twice, you will have learned a lot about yourself and about trading, you will have saved yourself a lot of money and you will have cash available when you are really ready to trade.

Monday, February 06, 2006

A trader's fate

A lot of trading careers go:
1. Let's try the markets...Hey that's easy...Just buy or sell and make a nice living...On my first day I made 200$...doing just 2 trades.
2. One week later...hmm, slightly down overall...but so what, I can make it all back
3. 4 weeks later...Ohhh NOOOOO...what is that, this has to stop, add on, then it needs to rebound just 50 ticks not 100...I will add some more or I have no chance to make back the 200 ticks
4. R.I.P. ... another potential trading career ended unneccessarily

It ended not because our trader used no Stop, it ended not because he added onto a losing trade, no it ended because our immaginary trader did not take precautions for the fact, that he's just human. That humans make errors and that he would make errors as well in his new choosen career.

He had No Trading Plan, No Money Management and No Safety Net present.

  • You need the Trading Plan to give you a statistical edge to beat the market
  • You need Money Management Rules to make sure you have an account left, when your Trading Plan tells you to act.
  • You need a Safety Net in place to make sure you can stand-up and fight another day, when you are left knocked-out, because you made a human error.