Are You Willing to Receive What the Market Is Willing to Give?

There are all kinds of traders. While one may sit and stare at every wiggle, another will enter his trade and then go mow the lawn, only checking hours later to see how the trade worked out.

Often, traders with an engineering orientation focus on developing and testing ‘systems,’ thinking they can strap a set of rules onto an ever changing market. In contrast are artistic traders who stress getting and staying ‘in touch’ with the ebb and flow of daily price movement.

Watching wiggles can drive you nuts! Pursuing a profitable system can drive you to drink! And, staying ‘in touch’ with ebbing and flowing can make you seasick!

So what’s the answer?

Well, I can only relate what works for me, of course, and who knows how long what works this week will last … With that, here goes:

Rule # 1: Watch out for ‘News.’ News trumps everything else!

Trends up, down, or sideways get quickly crushed if the Personal Consumption Expenditure (PCE) is a surprise number … or, if jobs created are way out of line compared to expectations … or, if the FOMC moves rates more or less than traders have priced into the market. News is numero uno and, if I’m being a responsible trader, I know what news is on tap and the precise minute it is due to be released. (Google ‘forex calendar’ to find schedules of daily economic news.)

If volatility makes you anxious, stay away during red hot news hours.

Rule # 2: Read the Charts. Charts reveal information when viewed from different time perspectives: 6 month, 60 minute, 30 minute, 15 minute, and 5 minute charts tell stories. What story does each currency’s chart tell? Which way is each currency moving … up, down, or sideways? Are there obvious formations unfolding? What about MACD and price divergence? Very often, the next move can be predicted by the direction the current move which reveals itself as you zoom in from afar. And, be sure to make note of the MACD trends and MACD histograms when sifting through the various currency charts.

Rule # 3: Look for Waves. No one surfs on a flat sea! Without waves there is no surfing and without price waves there is no trading. Prices move in rolling waves, unless ‘News’ pops up and creates a ‘Rogue Wave’. Traders don’t make waves. Traders, like surfers, ride waves and profit from the ride. In addition to moving on news events, waves are created when lots of traders move the market in one direction or another … who knows why? The point is, if you look for waves by reading charts, watching price action, and using all number of indicators, you can see (and feel) what’s happening … and what’s likely to happen next.

Rule # 4: Take Small Bites. Small, of course, is relative to the total you can afford to risk. Let’s say that everything you see indicates a wave is approaching … perhaps a currency has had a rapid rise or decline and the buying and selling looks to be exhausted … or, indicators show an overbought or oversold condition … or, a currency that normally trades ‘in sync’ with the currency you’re watching has reversed and is moving in the opposite direction … In any of these examples, it may be time to enter a position, but to do so without committing all of your forces. Take a small bite and see what happens. If conditions appear to be working in the direction of your expectations, take another small bite. And take another if conditions confirm the validity of your trade. Small bites allow traders to inch their way into a solid trading position, rather than suffering fits of anxiety over every price wiggle had they gone ‘all in’ with a single entry.

Rule # 5: Place Stops. Never, never, never, enter a trade without placing a stop. Stops are insurance when price movement doesn’t go as expected. Traders have the ability to change their stops as conditions change … but I’ve learned to bless the stops I’ve placed because they’ve saved my trading account more than once.

Rule # 6: Let the Trade Mature. While some trades can be profitable in seconds or minutes, most require time to build profits. In other words, I’ve learned to let the energy of the wave carry my position and build profits on the ride. Traders can’t force this … and it does take discipline to let the market do the work so that it gives you profits from the wave. Learning to ‘let profits come’ isn’t easy as most people are accustomed to ‘making profits come’.

Rule # 7: Record and Review. I’ve developed my own shorthand for noting the reasons for entry and the risk levels for each trade … followed by more shorthand describing the results. Profit or loss, of course, is one result, but it doesn’t explain the reason for either one … and you learn from reviewing what you did wrong and what you did well. Keeping a daily log helps me keep things in better perspective as the days, weeks, and months go by.

That’s it! But, I’m certain that I’ll be adding to this list as I mature and improve my trading skills and perspective.

Beware the 'Rogue Wave'

If you live anywhere near the ocean, you’re familiar with term ‘undertow’. Undertow is a current beneath the surface that runs away from the beach in opposition to the waves which break toward the beach. Undertows are dangerous because they can drag a swimmer out to sea despite all efforts to swim ashore.

Feeling any empathy for the swimmer caught in a current going against him?

Like undertows, ‘rogue waves’ are threatening, not because they can drag a trader down and out to sea, but because they are both unpredictable and enormous in size. Rogue waves can be and often are, fatal; a not so charming characteristic dramatically portrayed in several popular movies.

Unexpected NEWS is the ‘Rogue Wave’ of trading, and today we had a good example of what a rogue wave can do when it crashes down upon the forex market.

Today, Friday, November 3rd, traders expected the non-farm payroll report as it was scheduled for release at 8:30 AM. The consensus was that the number for October would low as the U.S. economy is thought to be in a slowing phase.

As is typical on such days, volatility was expected. What often happens, in fact, is that omnivorous traders drive down the price of popular currencies such as EUR and GBP just prior to release of the news … purposely feeding on the easy prey by swallowing all the stop loss nets put in place by unsuspecting traders. Hey, never said trading was for sissies!

Anyway, true to tradition, at approximately 8:15, the EUR dropped to 1.2755 and then jittered about a bit. I went long at 1.2763. At 8:30, the EUR shot to 1.2792 and I attempted an exit - without success as prices were changing too fast. Then, the EUR ratcheted back hard and I was lucky to exit at 1.2769 … booking a 6 pip profit …

… then a ton of real crap hit the fan … and EUR dropped like a 10 ton steel safe falling from the 40th floor … not slowing at all as it ran down 30 … 40 … 50 … 60 … 70 … 80 pips … not hitting bottom until 1.2681 … a total of 118 pips from its high and 88 pips from my lucky exit at 1.2769.

What the Hell had hit EUR – and driven USD up like a cork from the ocean floor?

NEWS! A damn rogue wave of news!

October’s non-farm payroll report had a low number … only 91,000 jobs and more or less predicted … but, September’s earlier number had been revised up from 51,000 to 148,000 jobs … and traders interpreted this, as well as related news that the unemployment rate had dropped to 4.4% ... as inflationary. Interest rates immediately screamed upward more than 100 basis points before exhausting the inflationary fuel that propelled the launch.

‘Rogue Waves’ are huge and inherently unpredictable … and yet this news event was predicted … and everyone was intensely focused on the numbers … traders just expected the news to drive prices in the opposite direction!

The lesson is that Rogue Waves can strike at any time … even when a news wave has been formally scheduled! Rogue Waves are nearly impossible to trade and represent far more peril than opportunity. At a minimum Rogue Waves are as dangerous to traders as undertows are to swimmers. More often than not, when Rogue Waves roil across the forex market, traders hear two words blackjack dealers love to speak: "You lose."

Iowa Electronic Markets - Graphic

IOWA ELECTRONIC MARKETS

Republican vs Democrats

for Control of House

Who Do You 'Bet' Will Win ???????

(To View - CLICK On Graphic)

Trading Day 11/02/06

This post covers two trading days, Wednesday, Nov 1st and Thursday, Nov 2nd.

Wednesday was a 'News Day' with the ISM Index scheduled for release at 10:00 AM. I executed three trades before the 9:00 AM ... up 8 pips and then made one of those really, really aggravating trading errors .... I was short the EUR and long CHF and intended to close the CHF trade but erroneously placed a second buy order!!!

I don't think I've done that but two or three times in all of the equity and forex trading I've done. That doesn't make it any less aggravating though ... and, I suppose if you're reading this and just starting out, it's good to realize even traders who have hit buy/sell keys thousands upon thousands of times can still screw things up occasionally.

Anyway, I learned long ago that it's best to step back a moment and assess what the damage might be ... rather than immediately pound the sell key. Afterall, I wanted to extracate myself with the least amount of pain and not make matters worse by exiting in a panic.

To make this a short story ... I was able to exit both long positions with a small loss ... down only a total of 6 pips. It wasn't quite 9:00 AM and, at that point, I was up a net of 2 pips.

OK ... ISM news was scheduled to be released in 1 hour. My thinking was that the Chicago PMI number was low and since the Chicago number and the ISM number have a 80% + correlation factor, and since there was absolutely no obvious contradictory data ... then, chances were very good that the ISM number would disappoint - meaning most currencies would rise against the USD.

So ... I placed my bet. I went long GBP at 1.9085 with a stop at 1.9067.

The News was released at 10:00 and I exited at 10:02 ... at 1.9129. Up 44 pips ... a net gain of 46 pips ... and I was done for the day, thank you very much!!!

So glad I had enough confidence to bet multiple lots on that trade!

Which brings us to Thursday ... and four trades. Realizing there next significant news was scheduled for Friday (non-farm payroll data), I suspected trading would be range bound all day on Thursday. It was, although I had scare when GBP pushed to a new daily high at 10:00. Despite having suffered a loss of nerve on that stretching candle, I ended up 3 out of 4 trades and netted 18 pips on multiple lots.

So far this week ... up a net of 98 pips ... and no significant losses or mental strain on the journey.

Tomorrow could be dangerous ... and, I need to decide whether to play the betting game, or to stand aside since the NFP number can go either way!

Iowa Electronic Markets

Never heard of the Iowa Electronic Markets? Not surprised! Few have. But, the Iowa Electronic Markets can give you a valuable peek into the future direction of the foreign exchange market.

Here's what the Iowa Electronic Markets' homepage says about it's mission;

"The Iowa Electronic Markets are real-money futures markets in which contract payoffs depend on economic and political events such as elections. These markets are operated by faculty at the University of Iowa Tippie College of Business as part of our research and teaching mission." (Go to www.biz.uiowa.edu/iem/)

What's most interesting about Iowa Electronic Markets is that it's the only legal place to make predictive bets on the outcome of the upcoming mid-term elections. In past elections, with real money at risk, punters placing real money bets on the Iowa Electronic Market have proven to be accurate predictors of important election outcomes ... which gives traders a crystal ball to gaze into and ponder.

What does this mean for forex traders?

Kathy Lien, Chief Strategist for FXCM, writes that gridlock may not be good for the US dollar. "Following the Republican's win of the House and Senate in early November of 1998, the EURUSD fell from 1.1900 to 1.1450 for 450 points in only three weeks time. In the following twelve months, the extended move accounted for 1500 points."

So, you might wonder ... what outcome does the Iowa Electronic Market predict in next week's election? By overwhelming odds, 70%/30%, the Iowa Electronic Markets peer-to-peer exchange predicts the Dems will take the House ... giving us a divided Legislative branch.

With that forecast, traders, you're now in possession of important statisitical information that should be used as you cobble together next week's USD trading strategy!

The Trader's Prayer

THE TRADER’S PRAYER


DEAR LORD, please grant me the WISDOM to resist the siren song of the market when I am not prepared;

The SELF-DISCIPLINE to study market trends, current direction, and as many indicators as I reasonably can;

The PATIENCE to stand aside from the market until multiple indicators support low risk entry points;

The COMMON SENSE to use stop losses to protect my trading account from reckless losses;

The INITIATIVE to record my trades and the lessons I learn in a daily journal;

The EMOTIONAL BALANCE to accept that losses are inevitable and to not be overly self-critical when they occur;

The HUMILITY to acknowledge and learn from my mistakes;

The DEDICATION to identify and overcome destructive trading behaviors;

The COMMITMENT to stay positive and focus on learning each day;

The UNDERSTANDING that trading is an opportunity to master oneself, and;

The GOOD SENSE to appreciate that trading offers a life of learning, personal empowerment, and financial independence.

Never Average Down

All traders are familiar with the maxim; ‘Never Average Down.’

Never averaging down may be an appropriate guideline when applied to long-term investing, but it often means lost profit opportunity or even losses when applied to day-trading the foreign exchange market.

Such an idea implies, for example, that you know precisely where the top or bottom of a market is, or at least that you know the direction of all future moves within your trading timeframe. Of course, anyone with an ounce of day-trading experience knows that such an idea is foolish as it’s only in retrospect that ‘tops’ and ‘bottoms’ can be identified with certainty.

Day-trading is all about discernment; discerning direction, discerning risk, and discerning the probable strength of a currency’s move. Price action often moves against your position after you’ve placed a bet (long or short), but that could offer an opportunity to improve your position by ‘averaging down’ rather than be a signal to just sit and suffer.

In other words, it depends on what other signals are indicating, and on what other currencies are doing, when the price moves against you. If you calculate that there are multiple signals/indicators moving against you, it may be best to exit immediately, or to exit and reverse your position. Again, day-trading is all about discernment.

Discernment is a function of experience. Pilots unfamiliar with certain weather conditions can make fatal decisions … and I’ve known some who did. With experience pilots can learn to safely navigate using the dials, indicators, and instruments that convey meaning to them. The same is true of traders. Inexperienced traders can make catastrophic trading decisions because they lack the acumen to discern with accuracy the risk of taking or of staying in a position.

‘Never Average Down’ is one of several misleading investment maxims that do not necessarily apply in the world of forex trading.

Trading Day 10/31/06

Wow ... what an awesome day. Immediately on the news that U.S. consumer confidence had dipped unexpectedly, everything roared nearly 100 pips up in what seemed like only a nanosecond.

I had picked up 24 pips before the news and then exited not wanting to get hit by a 'Rogue News Wave.' In retrospect, I would have been better off placing a one lot bet with a reasonable stop loss.

In any case, once the EUR rocket ship reached the top of its climb, it flittered about for a bit and then began a slow descent. I shorted the EUR and remain in that trade. It looks as if I'll pick up another 10 or more pips before I close out the day.

The rocket was a wonder to watch and while it would have been nice to have been on board, I realize I can't catch every one and I make a point of reminding myself to appreciate the fact that I had another good trading day!

Impaled

Here’s the best definition of the inner world of a trader that I’ve ever seen …

Traders are impaled on the three points of a psychic triangle.

This phrase describes perfectly the trader’s constantly changing inner state as he weighs the imperative existing at each triangle point: Which currency should I trade? How much should I risk? And, when should I enter/exit?

Certainly traders have different emotional make-ups, and while each individual handles these insistent questions in his own way, the image of a dynamic triangle in continuous straining flux is one hell of a metaphor for the emotional and decision-making balancing act that every trader must sustain during the trading day.

The image is artful in its accuracy and evokes a higher heart rate just in imagining it.

Trading Day 10/30/06

One of my favorite economic trend commentators is John Mauldin. In his most recent e-newsletter, titled, 'That Stubborn Yield Curve,' John makes the point that the yield on the 10-year bond is 43 basis points lower than the yield on the 90-day T-bill. Now, most folks know that such an inverted curve is a reliable predictor that the US economy is headed for a downturn.

While the typical longterm investment choice would be to go long bonds and reduce equity holdings, we Forex traders live in a vastly smaller time dimension ... like, what's gonna happen today?

My bet was that the EUR would fall a bit in the morning, consolidate, and then on release of the Core PCE Price Index, rise ... no matter what the number. I mean given the slowdown in the real estate sector and in GDP growth, how bad a number could it be?

So ... I bought the EUR three times as it nudged its way down before 8:30. When the news was released, EUR fell further but the 5-minute bar never closed below 1.2700, so I held on. EUR slowly recovered taking all morning to do so. I exited just after noon as I get anxious holding positions into the PM hours.

My trade was profitable, just barely, but it turned out that my thinking was fundamentally correct and the EUR kept rising.

I'm thankful that my trade made money, and I am open-minded about developing some better guidelines regarding afternoon trading ... like, don't open new trades, but stay with trades if indicators are pointing in the right direction.

As it was, the Fast Stochastic, RSI, and MACD all turned up and EUR rose an additional dozen pips ... a lesson for next time!

Trading Day 10/26/06

Was away from my trading desk yesterday (Wednesday)-- probably just as well since the Fed interest rate announcement was scheduled for 2:15 PM -- I didn't think much was likely to happen before then.

Looking back, however, it appears that traders correctly anticipated the continued pause mode of the Fed and steadily bought EUR and GBP all day long.

With both currencies up more this AM, I waited until they pushed through today's high before buying. EUR and GBP edged up and then stalled. Not wanting to suffer through a so-so move, I exited both picking up 19 pips.

Now, I'll stand aside until a definitive move appears.