The single most important trading system is – YOU

Boris Schlossberg

Standard economic thinking would have you believe that the bigger the financial incentive the better you will perform. The idea is that if I pay you more money you will exert more effort and will do the task better.

That’s actually partly true. Uri Gneezy, an economist at University of California at San Diego, paid college students $300 instead of the usual $30 to type a sequence of keys on the computer. Accuracy rates went up from 40% to 80%. For mindless rote activity higher incentive produces better results.

However, that assumption fails miserably when the task at hand requires even a modicum of cognitive ability. The same experiment of paying students tenfold to add a series of numbers in matrices showed a massive decline in success rates from 65% to just 40%.

An even more striking example of this dynamic occurred in poor regions of India where Gneezy ran an experiment asking people to pack tools in the most efficient manner. Participants were paid 10 cents, 1 dollar and 10 dollars each (10 dollars represented a month’s worth of wages for that cohort) At $1 per task 25% of participants succeeded in the task. When the payoff went to $10 every single person who took test failed it. That’s a remarkable insight into human psychology and goes a long way towards explaining why when you decide to “size up” on the exact same setup that you’ve been trading for years you suddenly start to bleed money.

The greatest thing about trading, aside from the potential for profit, the intellectual challenge of finance and the emotional engagement of the game is that the markets are probably the purest, biggest psychological laboratory in the world. If you are honest with yourself and step back to examine it you would have to admit that trading has probably revealed more about your true personality than any other activity you’ve ever done. Good or bad, the markets lay you bare in front of the world in ways that few other things in life do.

I was thinking about that a lot this week, after listening to a wonderful System Trader podcast interview with Mandi Pour Rafsendjani who, instead of focusing on yet another mind-numbingly boring quant system talked about what it really takes to be a successful trader. It’s a wonderful episode and I encourage you to listen to it -- but there were a few key points that she made which I thought were amazingly perceptive.

First and foremost if you are anything like me you probably got into trading for the sense of autonomy. You hate being told what to do. You hate working under other people’s rules and you like the sense of freedom that trading brings you, even with all of its crazy risks. But if you are that type of rebellious person, yoa u probably also hate paperwork and bureaucratic processes and record keeping. After all -- you are trader, not a bookkeeper!

Yet Mandi makes a very interesting point that it is precisely the structure of record keeping that is the gateway to the freedom you seek. Because it is only through record keeping that you will be able to improve. Mandi, who has interviewed scores of traders, notes that winners focus on facts and figures while losers focus on feelings.

Still, the record keeping she has in mind is unlike any you’ve ever seen before. Mandi will be the first to tell you that if you don’t have a setup that you can write out on the back of a napkin, you have nothing. In short, you need a clean, clear set of rules that will guide your trading. But keeping score of the winners, the losers, the drawdown, the entry and exit permutations, the instrument selections and all other usual suspects of trading is just the beginning. In fact for us in FX, the act of record keeping can be 99% automated with journaling websites like www.myfxbook.com.

When Mandi talks about record keeping, she has something else in mind entirely. She believes that record keeping of your state of mind is just as important as journaling your trades. Here are just some ideas she shares. Do you have a magic number of trades after which you get sloppy? For example, she notes that after five winning trades she tends to give a lot of her profits back. So now she simply walks away from the screen and works LESS. What about treating same trades in a different way? For example, when a trade initially goes into profit and then into a loss, do you have a hard time taking the stop versus a case of when a trade goes negative right away? (Guilty!) What about fixating on reaching a key dollar figure on your account equity (like say $10,000) which forces you to leave trades open because they haven’t reached your “target”? (Guilty!) What about trading a style that does not fit your personality because everyone tells you that’s what you are supposed to do? (Guilty!)

For me, the two greatest recent realizations have been that I am a serial, not a parallel trader. I do best when I trade one position at a time. (Read my New York subway column from a few weeks back for more details on that) The second most important realization is that I always lose money if I trade without an execution algo. If I am tapping buttons on my MT4 iPhone app as I dart in and out of the subway -- that is always the start of a journey to trading hell. I will ignore my sizing parameters, I will ignore my stops and I will inevitably cover for a loss after needlessly battling the market for days. On the other hand, if I am entering from a preset template off my well worn MT4 EAs, my control is assured. I may win or I may lose, but either way, I will do it properly and will not damage my account unnecessarily.

Using Mandi’s approach of recording your own state of mind as well as your trades has been an eye-opening process. The irony of her approach is that while winners may indeed be preoccupied with facts and figures while losers are obsessed with feelings, the key facts and figures aren’t actually the standard trade blotter, but the emotions you go through as you establish your trade. Losers may focus on feeling, but winners focus on recording and studying those feelings on a continuous basis. What becomes very clear as you listen to the podcast, is that profitability in trading is much less a function of tweaking your system parameters and much more the case of minimizing your tendency to make psychological errors. Walking away from the interview you realize that the single most important trading system is -- YOU.

The Most Important Technical Indicator is… Fundamentals

Boris Schlossberg

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I am a technical trader. I trade price on the 1-minute chart, which is about as granular as you can get without becoming a high-frequency scalper. I couldn’t care less about Fibonacci levels, Gann angles, Elliott waves and any other geometric structures that traders try to graft onto what is essentially a never-ending price auction. If those tools work for you -- all the more power to you -- but I like to operate in the here and now, where my sense of the future is never more than an hour long.

I have a great new algo, called Trendy that we developed in my chat room and I am very happy to follow its signals. But Trendy, like all robots it is just an execution algorithm. Like a hunting dog, it can follow a scent but it can’t tell you if that scent will lead you to a dirty old sock or a murder weapon. Like all algos it needs to be turned on and off. It needs to be properly positioned. It needs to be … managed.

Just for fun, I let it run 24/5 on a demo account and watch it bleed money hour by hour, while I collect 20-30 pips most every day judiciously deploying five to ten times each day.

But much as I believe in the tactical value of trading price, the other day I realized that the single most important input into Trendy’s success is actually … fundamentals. Today, for example, the market gave me three good Trendy trades -- a short AUDUSD off a meh RBA interest rate statement, a long USDJPY off the burst in US yields and a short GBPUSD off Jamie Dimon’s letter about the perils of Brexit. All else was garbage, as prices weaved and bobbed and dropped and chopped producing lots of heat but little light as they say the American South.

Technical analysis tells us what IS happening. Fundamentals tell us WHY something is happening. Understanding the WHY gives us the confidence to predict that the price action in the near future. Especially if we’ve seen that pattern of behavior hundreds of times before.

Does it work all the time?

Of course not.

Another story could come by and bump our analysis out of the way. Or some large, non-price sensitive order could disrupt market flow completely and stop us out. However, on balance, this approach works 70% to 80% of the time with reasonable risk-reward ratios. That’s because instead of segregating technicals and fundamentals into two disparate disciplines, this methodology tries to synthesize the two and treats them as two sides of the same coin.

To make a successful day trade you need two things -- the price action to be moving your way and news flow to continue pushing prices it in that direction. Trading, after all, is very simple. It’s the act of predicting that price will either continue or reverse.

So instead of having never ending debates as to which method works, isn’t it better to always be aware of both technicals and fundamentals at any given moment in time so that we put the odds in our favor and make more accurate trades?

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NZD/USD – Why 73 Cents is Important

NZD/USD – Why 73 Cents is Important

Chart Of The Day

NZD/USD – Why 73 Cents is Important

For the past few weeks, NZD/USD has made many attempts to close above 73 cents and for the most part it has been unable to do so. Yesterday, strong employment numbers and a sharp increase in dairy prices failed to help the currency pair sustain its gains and that suggests that NZD/USD is nearing a top. The reason why 73 cents is so important is not just because it’s a 1 year high or that the pair has attempted to close above that level on numerous occasions but because it’s the 38.2% Fibonacci retracement of the 2009 to 2011 rally. If this year’s high of 0.7340 is broken, then its clear sailing to 75 cents. If 0.7340 holds and NZD/USD drops back below 72 cents, then we are looking at the possibility of a stronger pullback towards 71 cents.

The Single Most Important Thing to Improve Your Day Trading

Boris Schlossberg

Most of us wannabe George Soroses like to toil under the illusion that we are “macro traders” who will hold positions for weeks or months in search of the billion dollar profit. But let’s face it 95% of us are day traders. Certainly most of you reading my column are day trading for 10 pips or less rather than position trading for a 1000 or more.

Ask yourself these three simple questions. Did you do at least three trades today? Is the average hold time for those trades a couple of hours or less? Do you check quotes on your smartphone at least a couple of times each hour?

If the answer to all three is yes then you my friend are a day trader and I have only thing to say to you.

Spread.

Spread is the single greatest factor in whether you succeed or fail ( assuming of course you have some feel for the market).

Spread can be THE difference between winning and losing.

Recently I changed my account to raw spreads plus commission. Many of the BK tweeps who did not do that, emailed me to tell me that a broker with raw spreads plus commission is no different from a broker who just puts the full mark up into the spread. In other words if my raw spread on EUR/USD is 0.3 pips plus I get charged 0.8 pips commission for total of 1.1 pips -- that is no different than a broker who just offers a marked up spread of 1.1 pips. Mathematically the two brokers are the same but in reality there is a world of difference when it comes to results.

Allow me to illustrate.

Last week I started a LIVE TRADING ROOM where I trade my exclusive VT strategy on my own personal account live with a bunch of students from across the world. (Feel free to join me.)

In just the first day of business here is what happened. Friday morning I got caught in a bad GBP/USD trade that spiked against us. I had a stop at 1.5150 and the pair rallied right into the UK news and rose to 1.5149. Those traders who did not have raw spreads on their platforms got stopped out. I managed to survive the rally and then got lucky when the news turned out to be mildly pound negative allowing me to get out of my trade for essentially scratch.

A few hours later that day, after the US NFPs were released, I spotted a buy opportunity in EUR/AUD at 1.4400 and went bid the pair in hopes that price would come down to my level. On my raw spreads platform I got hit and the price then immediately rebounded and all of us made a quick 10 pip profit. ( We actually had a great opening day banking 40 pips in 12 hours on top of 80 pips we made the 24 hours prior).

However, some of the traders who traded on marked up spreads never got executed on their 1.4400 buy and therefore never made a dime on the trade. So in a period of less than 12 hours my raw spreads saved me 35 pips ( no -25 pips loss and +10 pip profit). Understand that I trade every day making 5-20 trades per day and average more than 1000 trades per year, so imagine how much of an edge I have when I trade on raw spreads.

I probably pick up an extra 1000 pips per year and all that profit has nothing to do with strategy, market environment or money management skills. It is something that all of you have the ability to enable.

BKSWING – Important! Adjusting Trades ahead of AU Employ and ECB

Swing

We are adjusting trades ahead of Australian employment and ECB Rate Decision


***CANCEL the following orders

1. CANCEL AUD/NZD Sell order at 1.0883

2. CANCEL GBP/NZD Sell Order at 1.9718

3. CANCEL EUR/NZD Sell order at 1.5656

Add the following NEW EUR/JPY and EUR/AUD Orders:

1. Sell EUR/JPY at 135.91

Stop at 136.51

Close 1/2 at 135.61, move stop to breakeven

Close rest at 134.25

2. Sell EUR/AUD at 1.4187

Stop at 1.4247

Close 1/2 at 1.4157, move stop to breakeven

Close rest at 1.4067

We still have the following pending orders on:

1. Buy GBP/USD at 1.6947

Stop at 1.6887

Close 1/2 at 1.6977, move stop to breakeven

Close rest at 1.7050

2. Buy EUR/GBP at 0.8060

Stop at 0.8000

Close 1/2 at 0.8090, move stop to breakeven

Close rest at 0.8150

3. Sell NZD/USD at 0.8373

Stop at 0.8433

Close 1/2 at 0.8343, move stop to breakeven

Close rest at 0.8210

4. Sell AUD/USD at 0.9175

Stop at 0.9235

Close 1/2 at 0.9145, move stop to breakeven

Close rest at 0.9015

5. Buy AUD/NZD at 1.1075

Stop at 1.1015

Close 1/2 at 1.1105, move stop to breakeven

Close rest at 1.1200

***Remember, if 2 orders trigger without one hitting T1 first, all other orders are canceled

BKSWING – NEW GBP Orders and IMPORTANT Order Cancellations

Swing

Over the next 24 hours we have UK PMI services, ECB and NFP scheduled for release. These are all hyper volatility events that we want to position properly for. As a result, we are adding GBP/AUD and GBP/JPY orders and CANCELING our EUR/AUD, AUD/USD and GBP/USD orders:

Place the following NEW pending orders:

1. Buy GBP/JPY at 175.58

Stop at 174.98

Close 1/2 at 175.88, move stop to breakeven

Close rest at 178.25

2. Buy GBP/AUD at 1.8227

Stop at 1.8167

Close 1/2 at 1.8257, move stop to breakeven

Close rest at 1.8475

We STILL have the following orders on the books

3. Sell EUR/CAD at 1.4473

Stop at 1.4533

Close 1/2 at 1.4443, move stop to breakeven

Close rest at 1.4225

4. Buy EUR/JPY at 139.62

Stop at 139.02

Close 1/2 at 139.92, move stop to breakeven

Close rest at 140.75

5. Sell AUD/CAD at 0.9970

Stop at 1.0030

Close 1/2 at 0.9940, move stop to breakeven

Close rest at 0.9725

***Remember, if 2 orders trigger without one hitting T1 first, all other orders are canceled

BKSWING Important Order Adjustments – EUR/JPY, GBP/JPY, EUR/AUD

Swing

New Order for CAD/JPY and EUR/JPY. Remember, we allow for 2 live trades at any time. If we think an order should be canceled we will message you

1.Buy CAD/JPY


Place Order to Buy CAD/JPY at 92.40

Stop at 91.80

Close half at 92.70, move stop to break-even

Close rest 94.00

2. Buy Order for EUR/JPY


Place Order to Buy EUR/JPY at 140.22

Stop at 139.22

Close half at 140.72, move stop to break-even

Close rest 141.22

Risk is back on and between the market’s positive reaction to ECB and the rise in oil prices, we are laying on 2 new trades for CAD/JPY and EUR/JPY.

CANCEL EUR/CAD Sell order at 1.4770 AND EUR/JPY Sell order at 135.77

We STILL HAVE the following orders on:

1. Sell Order for GBP/JPY


Place Order to Sell GBP/JPY at 163.61

Stop at 164.61

Close half at 163.11, move stop to break-even

Close rest 162.61

2. Sell Order for EUR/AUD


Place Order to Sell EUR/AUD at 1.4943

Stop at 1.5043

Close half at 1.4893, move stop to break-even

Close rest 1.4843

Key Forex Trade Levels Daily Technicals 12.4.13

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