Interview: Travis McKenzie – Lifestyle Trading

April 2011

»» Who with Whom? FOREX How to Use Correlations in the SPECIAL Forex Market

Welcome to the World of »» Getting an Edge in The FX Market Learn How to Trade with Precision Forex Trading »» How Fast Is Your Money? We Show You How the FX Market Works and What Opportunities It Offers A Scalping Strategy for the EUR/USD

»» A Declaration of Independence Your Own Rules for Successful FX Trading TRADERS´ EDITORIAL 2

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Have you also already heard of the of focusing exclusively on trading in the inter-bank experience will survive the market and have a chance to profit (Forex)? A place where it is said you can easily earn a fortune? market and customers are benefiting notably from excellent consistently. Whether you are a beginner, a professional, untalented or treatment. Competition is tough and every is trying For this reason it is extremely important, especially for gifted, anyone can advance to a new trading dimension and in to offer the best service. That is leading to extremely low beginners, to look at the risks as well as the opportunities a short time and rise to ranks of the millionaires… fees, great trading platforms, first class service, unbelievable this market offers. A leverage factor of 200 which is available Well, it is not quite as easy as that. Forex is basically a zero- leverage opportunities and more. practically only in this market, is effective when profiting, but sum game. That is, if you win, somebody has to lose or the But here too, there is a certain amount of danger. Especially even more dramatic when losing. Therefore, heed the risks other way around in order for the market to be balanced. So for inexperienced traders who often do not know how when trading! Always remember that in order for somebody to now, let us shift down a gear and plant ourselves firmly on the to handle the tools they are provided. Compare that to a win, somebody else has to lose. In the long run you and only ground of reality. It is of course possible to achieve success in beginning driver climbing into a Ferrari. Of course he knows you determine on which side you will end up. Enjoy reading trading Forex however, it is actually anything but easy. It is very how to work the clutch and the gas pedal and to turn the and learning. much a challenge. The good news is that there is something steering wheel. Nevertheless, there is the danger that he will you can do about it: In order to support you on your way to end up off the road one he encounters his first high-speed becoming a successful Forex trader, we have released this curve. Good Trading special edition of TRADERS´ to supply you with the necessary It is the same with Forex. It may appear that you are dealing tools to make your journey as smooth as possible. with a get rich quick scheme. In truth you are involved with With growing interest in Forex, the entire financial sector of one of trading’s top disciplines. Only those who know what Forex brokers has changed. Meanwhile, there are a host they are doing and have a certain amount of knowledge and Lothar Albert

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Call now to get your risk-free, 30-day trial* and Advanced Charting receive free weekly product training. Use drag-and-drop functionality, customisable technical indicators, multiple symbol overlays and other enhancements designed for active traders +44 (0)20 7825 7911 iPhone Users: www.eSignal.com/offer/tuk Try the Interactive Data Mobile app for free with quotes, charts and news. Go to the Award-Winning Products *All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. The eSignal suite of products Call for details. iTunes App Store today. eSignal is a registered service mark of Interactive Data Corporation. has consistently been Interactive Data Desktop Solutions (Europe) Limited, a company regulated in the UK by the Authority. voted best by users worldwide In Australia, Interactive Data Desktop Solutions is a service of Interactive Data (Australia) Pty Ltd provided under AFSL Licence No. 234689. x14352 TRADERS´ CONTENT 4 04/2011 April COVERSTORY STRATEGIES

Welcome to the World A Secret of Funds Managers of Forex Trading Successful Management We Show You How the FX Market of Trading Portfolios Works and What Opportunities It Offers Getting an Edge in the FX market INSIGHTS Learn How to Trade with Precision

STRATEGIES Additional Data – Forex and Market Techniques 35 A Secret of Funds Managers Better Performance A 1-2-3 for Your Using Parallel Multiple Data Success on the Currency Market Streams to Hone Your Performance How Fast Is Your Money? Embrace Efficiency A Scalping Strategy for the EUR/ Trading Efficiently as a Business USD

Correlations in the Forex Market Limit Your Losses and Who with Whom? Let Your Profits Run Using Daily Data for Triggers and COVERSTORY Short-term Data to Manage the Trade Welcome to the World of Forex Trading TOOLS Trading GBP/USD INSIGHTS New Products Using Parabolic SAR (PSAR) 22 Embrace Efficiency Increase Your Probability of Making Higher Returns when Trading Forex Bookmark

BASICS

A Declaration of Independence Use Your Own Rules to Be a Successful Forex Trader

Spearman Indicator – Part 1 From Intelligence Assessment to

PEOPLE PEOPLE STRATEGIES BASICS Travis McKenzie Getting an Edge in the FX market A Declaration of Independence Travis McKenzie 70 39 63 Lifestyle Trading

04/2011 www.tradersonline-mag.com TRADERS´ INFO 5

Address TRADERS´ media GmbH Barbarastrasse 31, D-97074 Wuerzburg Phone +49 (0) 9 31 4 52 26-0 Fax +49 (0) 9 31 4 52 26-13 E-mail [email protected]

Publisher Lothar Albert TRADERS’ media GmbH is a financial markets publisher specialising in education and continuing education in the field of trading and securities markets. TRADERS’ media was founded in April 2004. It publishes the trading Subscription Service www.traders-mag.com; www.tradersonline-mag.com magazine TRADERS´ in the German (print), English (digital), Dutch (digital), and Arabic (digital) languages every [email protected] month. TRADERS´ magazine was founded in 2001 by market mavericks Lothar Albert and Allison Ellis. Lothar Tel: +49 (0) 931 45226-15

Albert is CEO of TRADERS´ media GmbH and chief editor of TRADERS´ magazine. Further TRADERS´ editions will Address of Editorial and Barbarastrasse 31, 97074 Wuerzburg follow focusing on Asia (Singapore), India and Russia and coming soon in the very near future, an edition for Latin Advertising Department America in Spanish. For four years in a row, 2004-2007, TRADERS´ has been awarded the title of World’s Best Magazine for Traders by Trade2Win, an international community of traders. Editor-in-Chief Lothar Albert TRADERS´ is different and unique because we do not give any advice or recommendations on what to trade. Editors Prof. Dr. Guenther Dahlmann-Resing, Karsten This makes our content very different from any other market magazines. We are not interested in giving people Gore, Johann Gorol, Marko Graenitz, Theresa certain buy and sell recommendations, but rather in teaching the basics of trading from the state of the beginning Hussenoeder, Sandra Kahle, Nadine von Malek, to the professional level. Rodman Moore, Stefan Rauch, Tina Wagemann, Sarina Wiederer Our magazine has established itself as a source for information and communication for elite traders in Germany, Europe and around the world. Current information about technical, Articles Bert Antonik, Mustapha Azeez, Steve Beaumont, Paul Day, Peter Devaere, Stan Ehrlich, Ralf mathematical and psychological aspects of the markets is discussed in professional Kraemer, Nadine von Malek, Nick McDonald, articles and interviews. Each issue contains articles about trading strategies (for Travis McKenzie, Thomas Stridsman, Dan Valcu, basic, intermediate, and advanced traders), risk management, technology for Eric Waddell traders, business issues for traders, book and website reviews, and much Pictures www.photocase.de, www.fotolia.com more! Price data • www.captimizer.de Still today, the trader-elite are interested in professional and current • www.esignal.com trading knowledge and experience. For dedicated traders, there is no need • www.metaquotes.net • www.tradesignalonline.com for buy and sell recommendations. Trading pros make their decisions with • www..com self-confidence and are self-contained. These people know that trading can be profitable in bull and bear markets. The question is: what are the ISSN 1612-9415 markets and tools that lead to success? TRADERS´ magazine addresses this question every month in several languages. Disclosure The information in TRADERS´ is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

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We Show You How the FX Market Works and What Opportunities it Offers What is Forex? the foreign-exchange trade is an Forex (foreign exchange) is the Over the Counter (OTC) market, inter-bank market for international currencies are not traded via a Welcome to the foreign-exchange trading. central market place but outside Although the currency trade has officially-recognised stock existed in the financial world for exchanges and directly between World of Forex Trading more than half a century, it has market participants themselves. only been in the last few years This means that it is not subject that the little guy has been given to any government oversight and Our currency system is still feeling the effects of the financial crisis: inflation, Quantitative Easing, nationalisation a chance to participate in this hence is unregulated. But in the of banks and enterprises and so on. That is why many experts are demanding reform of the regulations governing market – thanks in no small part absence of a central clearing credit and money, for example, some are advocating a return to the gold standard. Despite these difficulties, the to the opportunities offered by house, trade is comparatively currency markets offer great opportunities for both traders and investors. While 15 years ago that market was the Internet and ever-developing opaque. As a rule, transactions restricted to big businesses, hedge funds and institutional investors, it has for some years also been accessible to computer technologies. are only known to the two parties retail traders. The following article presents a detailed introduction to the Forex markets while explaining what Forex The Forex market actually concerned. is, how the markets work, and what opportunities are available. originated in the 1970s in the A currency pair consists of two transition from a fixed to a components: The first currency floating currency system. Since is the base currency whose

04/2011 www.tradersonline-mag.com TRADERSTRADERS´ COVERSTORY´ INSIGHTS 7 value is always one. The second and currently determined on the Forex traders never need to advances in computer technology spreads are, as a rule pretty currency is the target currency. If, Forex market. wait for the market to open. and new software developments good.The spread is an important for example, EUR appears first, Ultimately, Forex trading This means that overnight risk have opened the market to small criterion in choosing a broker. It then the second digit means how means buying one currency and and unexpected price gaps are investors. An increasing number is absolutely necessary for you much the subsequently named simultaneously selling another nearly non-existent (excepting at of brokers and banks grant retail to make sure that the spread is currency is worth in . So currency on the currency markets weekends). Besides, stop-loss investors access to the Forex always guaranteed, for example EUR/USD with a view to posting a profit orders may be executed at any market via the Internet. This is when economic data are being means how from positions held of different time, and this kind of flexibility is how David Jones, Chief Market published! many dollars currencies. Placing an order not found in any other market. Strategist at IG Group, sums it Beyond that, margins are you get for could not be more simple, and up: “This means that the most very low in currency trading. the procedure Enormous Liquidity important players are the big Depending on the size of the is practically Forex is the largest and most banks, businesses, hedge funds, order, they sometimes only identical to liquid market in the world with institutional investors, central amount to one per cent or even Daire Ferguson that used in sufficient money always being banks and nowadays also retail less. This means that brokers other markets. available as a result of 24-hour investors.” offer their clients high leverage, AVA FX Most trading. According to the most enabling even traders with little transactions recent figures, the average daily Low Costs and High Leverage capital to make big profits – albeit (about 85 per volume amounts to four trillion Since the FX market is an inter- high losses, too. one and how many dollars cent or even more) take place dollars, causing the currency bank market and therefore you have to pay for one euro. in the major currencies, i.e. the market to exceed the volumes of does not entail any additional Further Benefi ts The exchange rate between USD, EUR, JPY, GBP, CHF, CAD, all other financial markets. This commissions for services Aside from the benefits of two currencies is determined by and AUD. leads to narrow spreads causing provided by a stock market, liquidity, 24-hour trading, and market conditions, i.e. the ratio slippage costs to decrease and trading low costs, the Forex trade is of supply to demand. ‘Bid’ is the 24-Hour Trading both buy and sell orders to be there is also fascinating because of its price at which you can sell, and Unlike other money markets, the executed faster. According to considerably high-trending markets. Unlike ‘ask’ is the price at which you currency market is open 24 hours Mr Joerg Ernst, head of FXdirekt less the futures and stock markets can buy. Most of the time, there a day, five days a week. Every bank, high which frequently feature spikes is a difference between these two day FX trading commences in liquidity and and gaps, trends in the Forex figures (spread) expressed by Sydney, then moves to Tokyo numerous market usually run very evenly the unit “pip”, which is the fourth before continuing on to Frankfurt market Roger Rutherford and smooth. In fact, currency digit after the comma. Currencies and London and finally closing in participants markets are considered to be are goods just like pork bellies or New York. This way, every trader guarantee CME Group the best trend markets that gold. Due to the ever-changing can trade currencies in every time fair price exist. Some currency pairs are conditions of a country‘s zone, no matter whether it is day formation at constantly in a trend while others economy (labour productivity, or night. any time. expensive. For example, Forex predominantly run in sideways inflation etc), the purchasing However, outside European and The bulk of the volume (90 traders usually only need pay phases. Since both positive power of a currency vis-à-vis American trading zones liquidity to 95 per cent) is provided by the spread and a low transaction and negative predictions can other currencies is subject to decreases considerably with the world’s largest commercial fee. The narrower the spread, the easily be reflected in long or strong fluctuations. The exchange trade concentrating between 8 banks, whether attributable to better for the trader. And since short positions in the FX market, rate between two currencies is am and 6 pm Central European proprietary trading or trading the currency market is highly the direction of the trend is therefore not fixed, but constantly Time (CET). Following any news, done in clients’ interest. But major liquid, prospects for narrow particularly relevant to traders.

04/2011 www.tradersonline-mag.com TRADERS´ COVERSTORY 8

This leads us to yet another the US dollar. For example you Although there is the benefit of currency trading: “You can calculate the cross rate EUR/ occasional offer of currency can go both long and short”, CHF by the majors EUR/USD futures, currencies are explains Daire Ferguson, Head and CHF/USD (Figure 1). Another predominantly traded in the inter- of Trading at AVA FX. “What is example: you may profit from a bank market – either directly special about Forex trading is devaluation of the British pound between the banks or indirectly F1) Cross Rates that traders buy one currency vis-à-vis the Japanese yen even if by retail investors via brokers. (for example, euros) and at the the pound is quoted unchanged After all, the crucial advantage of same time sell the other one (for vis-à-vis the Euro or dollar. This inter-bank trading over a stock example, dollars).” This makes will offer traders numerous exchange such as, the CME is it possible for them to profit different combinations. that traders are considerably either from a firmer Euro and/ more flexible and can determine or a weaker USD. their position sizes Again, this shows the themselves while many opportunities with futures they provided by currency The key question is: need to trade a trading – as opposed complete MiniFX or to the stock market. Will the key interest a regular contract, Beyond that, the as is required by the Here is an example for a cross rate. The EUR/USD and the CHF/USD are major currencies. Their rates result in the cross rate EUR/CHF. Forex market is far rates be raised or cut? . ”By less volatile than the same token, stock Source: TRADERS´ Graphic other markets so that exchange trading traders carry lower risk. On just Trading Channels is safer and more transparent,” one day, stocks may move by 20 Basically, there are two different argues Mr Roger Rutherford, per cent, in extreme cases even trading channels for currencies: CME Group’s managing director F2) Inter-bank Market by 50 per cent. By contrast, the trade via the stock exchange or of FX products. “The growth maximum daily fluctuation rate the direct inter-bank business. of CME Group’s futures and of currency prices is between On stock exchanges it is possible options products, as well one and two per cent. Moreover, to trade currency futures that as the recent BIS (Bank for the FX trade is suitable for are very similar to futures International Settlements) survey portfolio diversification since contracts for commodities or results, illustrates the need for currency markets, as a rule, move indices. In fact, though, they counterparty risk mitigation and independently of stock markets. are standardised futures whose the central counterparty clearing Cross rates are another conditions such as expiry date model that exchange trading opportunity provided by FX or contract size are set by the offers.” trading. A cross rate is defined stock exchanges. By contrast, as the rate of a currency which the so-called forwards that are Factors of Infl uence The value of one currency relative Currencies are predominantly traded on the inter-bank market is the result of the rates of other traded in the inter-bank market, between the banks or by retail investors via brokers. It is not a physical currencies. Cross rates normally i.e. outside officially-recognised to another depends on many exchange and thus is not regulated. are determined for currency pairs stock exchanges, can be more different factors. “The most Source: TRADERS´ Graphic in which neither component is individualised (Figure 2). important of these is the strength

04/2011 www.tradersonline-mag.com TRADERS´ COVERSTORY 9 of the domestic economy and According to David Jones, the form of news, seminars, chats more than three pips. However, software in order for your orders the monetary policy of the developments in national and many other things, we enable these numbers only apply to a to be definitely executed even central banks”, says Steven economies also play an important especially retail investors to have liquid market, i.e. in the case of a in case the server happens to Quirk, Senior Vice President at role in currency trading. access to the Forex market.” major trading currency and during break down during a trade. All Trader Group TD Ameritrade. He argues that key factors According to all the brokers major trading hours. By contrast, the brokers questioned at AVA For example, a weak currency include gross national product, questioned, a very good round- the spread may be considerably FX IG Group, and TD Ameritrade has a positive impact on unemployment, or the consumer- the-clock service is indispensable. wider in a volatile market offer guaranteed order and stop exports since the prices of price index since they reflect the Differences between the environment and when trading execution – even in case of a products fall and are hence state of an economy. brokers can be found especially less common currency pairs. technical failure. more competitive. Above all, with the spreads of ask and bid Beyond that, there may also I might add that even in the FX traders should watch out for The Right Broker prices. As mentioned earlier, be major differences between little-regulated Forex market there the following data: The results Brokers act as intermediaries in brokers only make money from individual brokers with regard are agencies monitoring many of the meetings of the central Forex trading, bringing together the spreads, which is why the to corporate policy. So always brokers: for example, the NFA banks in the US, Japan, and buyers and sellers of currencies. spread is an important criterion pay attention to your broker (National Futures Association) in the EU. The key question here Mr Steven Quirk explains a when choosing your broker. For guaranteeing order execution the US and the FSA (Financial is: Will the key interest rates be broker’s job as follows: “Through example, in inter-bank trading and placing of stops. In addition, Services Authority) in England raised or cut? This will clearly our constant and always up-to- EUR/USD spreads of one to two you should make sure that they whose websites provide investors impact inflation and the value of date dissemination of information pips are the norm while in retail have redundant systems in place with extensive information on a currency. surrounding currency trading in trading the spread should not be to secure their hardware and retail currency trading.

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04/2011 www.tradersonline-mag.com TRADERS´ COVERSTORY 10

FX Trading for Retail Traders can also cause you to sustain market: technical analysis and Having explained what the Forex enormous losses should the price . While market is and how it works, we develop in the wrong direction. the former systematically deals are now going to show what According to Daire Ferguson, with charts, mathematics, opportunities it offers retail fast and robust online trading resistance etc, the latter is traders. platforms also offering equally based on political and economic Basically, reliable trading tools are the FX information. Every trader should in currency trading basis for retail investors. always choose the strategy trading “Of special importance here is they feel most comfortable trading straight with. Should you decide to from the chart, opt for fundamental analysis, as are alarm you should respond quickly David Jones systems, to news and information and indicators, develop a deep understanding IG Index setting trailing of the markets and the way they stops etc.” operate. If you choose technical Beyond analysis, you need to consider transactions are only worth while that, stock exchanges, too, are ahead of time which approach from a size of at least 100,000 continually offering new and fits your own trading style: Euros. Of course, not every retail attractive products. For example, ordinary charts, mathematical trader has such funds at their in recent years the CME has formulae, or quantitative disposal. The solution to this launched the so-called Forex methods. problem is leverage. According E-Micros. “Active individual Since the Forex market is a to the principle of margin trading traders looking to participate distinct trend market, the majority F3) Trading Example it is not necessary to own the in the global FX market, or of FX traders use technical entire amount but it is enough to small businesses seeking a analysis. leave a deposit amounting to only cost-effective hedging tool for Especially for one to ten per cent of the sum their FX risk, can choose Forex the neophyte, of the transaction. For example, E-micro futures as a versatile and this in order to make a 100,000 Euro accessible transaction this method only new resource requires a 1,000 Euro deposit. to manage This means that you can operate their Steven Quirk with large sums in the Forex exposure,“ market despite having limited explains Mr TD Ameritrade funds. On the other hand, you Rutherford. can achieve considerable profits The EUR/USD quotes at 1.4000. A Trader expects a rising EUR and thus buys €100,000 and sells $140,000 simultaneously. He closes by using leverage if the currency The Right Strategy technique is easier to objectify. his position at 1.4050 EUR/USD. Now he sells €100,000 and buys price develops in the direction As in all other markets, there That way they can quite simply $140,500. His profit is $500 (140,500-140,000). anticipated. By the same token, are two fundamental trading do their currency trading using Source: TRADERS´ Graphic though, that leverage obviously approaches in the currency all the techniques they have

04/2011 www.tradersonline-mag.com TRADERS´ COVERSTORY 11 already learned in other markets. they optimise the criteria of Conclusion of the market, based, among trade, you should by all means Another advantage of technical the system and maximise their Despite financial crisises and other things, on high liquidity pay special attention to the analysis is that it can above all be profit. problems with monetary policy, and flexibility, 24-hour trading, choice of your broker. used in Intraday trading, whereas There are innumerable the Forex market offers even retail low costs and easily identifiable Currency trading is highly fundamental analysis is more variations within both technical investors sufficient opportunities formations. suitable especially for the geared to the medium or long- and fundamental analysis to participate in profiting from Beyond that, margin trading is technically orientated trader term time frame. Beyond that, from which to choose. Many exchange-rate fluctuations. extremely attractive especially for since chart patterns can often be technical analysis is based on successful traders even combine No matter whether we are traders with less capital. recognised easily and strategies clear-cut, systematic rules which these two approaches with one talking of the short-timeframe In addition, investors have the can be tested without expending make it possible for strategies to another. This means that currency orientated trader or the medium opportunity to choose between too much effort. Finally, I should easily be tested and compared to trading is possible both for the to long-term investor – today, the more flexible inter-bank mention that by now new one another. shorter and the longer timeframe currencies are more in demand market on the one hand and the innovations in trading platforms, However, in order to enjoy and is suitable for any type of than ever, be it in classical day relatively safer stock exchange software etc allow professional sustained success using this trader. In any case, there is a vast trading or as an addition to an on the other hand. In doing so, trading even outside the trading technical approach, traders varity of successful strategies existing portfolio, as a hedge they can choose from among the rooms of international banks. need to be able to document out there to ensure successful against price volatility, or to numerous trading instruments both the current and the Forex trading, as can be seen optimise financing through low- and strategies and, if needed, historical performance of a in our different strategy articles interest currencies. Quite clearly, combine these with one another. strategy. Only in this way can contained in this issue. the benefits seen in the efficiency In case you opt for the inter-bank

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04/2011 www.tradersonline-mag.com F:225 mm T:450 mm Elevateyour trading errors, Internet traffi Internet errors, factors. and other c, outages Services Authority (“FSA”) in the United Kingdom and has passport rights in EEA. in rights passport has and Kingdom United the in (“FSA”) Authority Services Financial by the regulated and is authorized Limited Europe TradeStation 2000. Act Markets and defi as Services Financial of the 21 subsidiary) Inc.’s in Section operating ned main guarantee of future performance or success. or performance future of guarantee • of any or Inc. futures or Securities, affiderivatives TradeStation by its securities endorsed liates. manner any in securities, or sell given or made, is buy to strategy, or solicitation recommendation or advice, offer No investment or trading of SIPC. and type any NFA or kind, any of FINRA, products NYSE, of member a is Securities TradeStation INFORMATION: IMPORTANT awards. the of announcements afi before over shortly subscribers ends magazine’s that the by period cast time xed votes of number highest on *Based • • • • • • Nowhat your matter level of is, trading TradeStation can help elevate your game. Call 00800 242Call 00800 78190 or 001 954 652 7677, or visit TradeStation.com/4010 that you cannot afford to lose. to afford cannot you money risk that or invest not should you therefore, investment; entire your than greater or to equal loss a sustain may you that possibility a is There investors. all for suitable be not may • tolerance. © 2011 TradeStation Securities, Inc. All rights reserved. rights All Inc. Securities, © 2011 TradeStation This material has been issued by TradeStation Securities, Inc. and approved by TradeStation Europe Limited (an introducing broker to TradeStation Securities, TradeStation Group Group TradeStation Securities, to TradeStation broker introducing (an Limited Europe by TradeStation approved and Inc. Securities, by TradeStation issued been has material This Enjoy free platform customization, expert training and dedicated customer support to links over direct execution20 trade with centers market lightning-fast Get RadarScreen with window single a in time real in symbols of hundreds Track trade $1.00per as low as commissions with Save Trade platform forexone from stocks, and all options, futures Our award-winning • Technical Technical Analysis of & Stocks Commodities • There is a risk of loss in futures trading. Options and Security Futures trading is not suitable for all investors. all for suitable not is trading Futures Security and Options trading. futures in loss of risk a is There Please visit our website www.tradestation.com for relevant risk disclosures. risk relevant for www.tradestation.com website our visit Please • * software is more powerful and easier to use than ever before System access and trade placement and execution may be delayed or fail due to market volatility or volume, quote delays, system and software software and system delays, quote volume, or volatility market to due fail or delayed be may execution and placement trade and access System • Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low risk risk low or experience, trading or investment limited resources, limited of someone for appropriate not generally is trading Active • All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiTechnologies, Inc. is by owned TradeStation in TradeStation Securities, technology liate of TradeStation proprietary All magazine Readers’ Choice Awards (2003-2011); in each award category, results are based on the company that receives the are on that receives based the in results company each award category, (2003-2011); Awards Choice Readers’ magazine F:225 mm • Past performance, whether actual or indicated by historical tests of strategies, is no no is strategies, of tests historical by indicated or actual whether performance, Past • Trading foreign exchange carries a high level of risk and and risk of level high a carries exchange Tradingforeign ® Trade at the Top Tradethe at

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LSE Launches Derivative Platform to Challenge Deutsche Boerse Exchanges Complete Trading Link Study

Xavier Rolet, the chief executive of the London Stock Exchange (LSE), has Four ASEAN Exchanges, unveiled plans to launch a derivatives platform in a bid to challenge the namely Bursa Malaysia (BM), dominance of Deutsche Boerse. Mr Rolet said the LSE, which will start by the Philippine Stock Exchange, offering a market in pan-European index futures and options, would "turn the Inc. (PSE), Singapore Exchange sector on its head". (SGX) and the Stock Exchange The LSE's Turquoise platform will host the new futures trading service. The of Thailand (SET) working platform will be formed through the acquisition by Turquoise of a 19.9 per cent together with NYSE Technologies, stake in EDX, the derivatives business held by Canada's TMX Group. The LSE announced that the design study and TMX are merging. David Lester, the chief executive of Turquoise, said: "The of the technology framework for European derivatives market is currently characterised by high execution costs the ASEAN Trading Link has been and a lack of choice." completed. Shortlisted vendors However, commentators argued that the move has come too late given the who are able to provide the dramatic consolidation plans among global stock exchanges. A few weeks ago infrastructure have been invited to NYSE Euronext and Deutsche Boerse announced a $24bn (£14.9bn) tie-up, tender. The ASEAN Trading Link which, through Eurex and Liffe, would hand them control of over 90 per cent aims to electronically interconnect of derivatives trading. Mr Rolet spoke out against the deal claiming it was anti- the participating markets and competitive. He told Reuters: "It cannot be said this is going to be anything but a facilitate cross border order trading seamlessly. Depending on the selected monopoly, because it will be." vendor, it is expected that the link will go live toward the end of 2011. Source: www.telegraph.co.uk, by Louise Armitstead Source: www.asiaetrading.com

Hank Pruden Honoured with Lifetime Achievement Award The Rise of Managed Futures

Managed futures, among the most complex and least understood of all hedge fund strategies, have grown 600 per A recognised global expert in the field cent since 2000, according to BarclayHedge. That is roughly 50 per cent more than the growth enjoyed by the overall of technical analysis, Hank Pruden, global hedge fund industry. Often known as "black box" funds because they are computer-driven, managed futures professor of business administration at the try to predict trends in commodities, currencies, bonds and equities. Once largely shunned by investors, who equated Ageno School of Business at Golden Gate black box with black magic, they now have a largely institutional following. Minds were changed by 2008: when the University, was honoured with the Michael average hedge fund fell 20 per cent, with managed futures the only strategy in positive territory. Epstein lifetime achievement award from the It is a distinctly British success story. The funds are now the largest European strategy by assets under management, Market Technicians Association Foundation. with the lion's share of the market based in the UK and concentrated in a few hands. The award is presented to practitioners who Source: www.efinancialnews.com, by Harriet Agnew (www.dowjones.com) have demonstrated a long-term commitment to technical analysis in academia and in practice. Source: www.ggu.edu

04/2011 www.tradersonline-mag.com TRADERS´ NEWS 14

US Panel Seeks Checks on Runaway Algorithmic Trade SGX Partners with NASDAQ OMX to Expand Tools

U.S. traders, clearing firms and exchanges could reduce the risk of a runaway Singapore Exchange (SGX) in partnership with the NASDAQ OMX Group, Inc. computer program roiling markets by using controls, such as kill buttons, an (NASDAQ: NDAQ) will be offering a comprehensive suite of tools and solutions advisory panel to the U.S. futures regulator said. After the May 6 2010 "flash designed to enhance corporate activities for listed companies in Asia starting with crash," where a large trade executed by an algorithm contributed to a sudden Southeast Asia and India. The SGX-NASDAQ OMX suite of tailored tools and solutions 700-point plunge in the Dow Jones Industrial Average, regulators, including the provides companies with market intelligence, communications tools and governance U.S. Commodity Futures Trading Commission, have been under pressure to step solutions. The suite includes access to impactful Investor Relations websites built to up oversight of the trades. improve shareholder communication, as well as the GlobeNewswire press release Five members of the CFTC's technology committee, representing exchanges, distribution network designed to effectively disseminate corporate announcements, brokerage firms and academia, proposed a framework of multiple, redundant and advertising opportunities through the NASDAQ OMX MarketSite in New York. checks to offer "robust protection" to markets – information the CFTC will SGX will also offer competitive market intelligence to assist companies in monitoring consider as it crafts regulation for testing their stock performance, peers' performance and industry developments by using powerful analytic tools and solutions. and supervising algorithmic trading. Listed companies can also use a secure portal to better manage board information and documents. "By raising the standards and establishing Source: www.sgx.com best practices, we can ensure that all participants are treated equally and ensure that the markets are protected from untested algorithms that could undermine New Surveillance Will Cost Euro Brokers $206M: Study well functioning markets," said Scott O'Malia, the CFTC commissioner who With the financial services industry is being overhauled under Dodd-Frank and MiFID II, new research from TABB Group leads the agency's technology advisory estimates that sweeping regulatory changes will lead brokers across the US and Europe to spend $206 million in 2011 on committee. new market surveillance programs. With hundreds of laws yet to be written and rules to be implemented, spending will grow The subcommittee did not address by 14 per cent annually to $268 million in 2013. penalties or what could be done by To comply, spending on external solutions is expected to grow from 28 per cent in 2011 to 35 per cent of total expenditure regulators if an entity fails to comply. in 2013 as brokers leverage vendors’ products to fit tight budgets and meet short timelines. According to Instead, the panel proposed trading firms Miranda Mizen, a TABB principal and author of the new research report, “Dynamic Surveillance: show an exchange they have implemented Detection, Prevention and Deterrence,” changes to market structure and new regulations a series of steps before being approved to mean conventional techniques need to be thrown out in favor of surveillance programs trade, including the ability to catch orders where the quantity exceeds a specified that match the markets’ dynamism. “It falls on the brokers as the primary intermediary limit before it is sent to the exchange, and the use of an "execution throttle" that between investors and exchanges to assist regulators in making sure that market would disable an algorithm if it receives too many fills over a certain period of surveillance catches up to the real-time dynamics of the market.” time. As a failsafe, each firm would need to be able to simultaneously cancel or Today’s surveillance programs are like a patchwork quilt, she says. “Some programs "kill" all existing orders and prevent the entire firm from placing new orders, if monitor comprehensively in real time, others look backward, but recent market abuse necessary. scandals and the May 6th 2010 flash crash have revealed there is a great divide The cheapest and most effective pre-trade risk protections could come from the between the way markets operate and the way they are actually being surveilled.” exchanges, according to the report. Pre-trade quantity limits, intra-day position To meet the onslaught of new requirements and regulations, TABB says brokers are limits, and an order cancellation policy would be among the measures required faced now with three gargantuan challenges: collecting, collating, analysing, storing and by exchanges, which would bear the brunt of the new costs. Exchanges told the retrieving data; ensuring practices and procedures prove their processes are robust and CFTC they already have many of these measures in place. defensible; and expanding the list of details they need to watch for. Source: www.reuters.com, by Christopher Doering Source: www.tabbgroup.com

04/2011 www.tradersonline-mag.com Up until recently the only way to the loop: one system applied to test a system was to apply it to one market bar-by-bar, the loop one market at the time, and in needs to be: one system applied so doing, in a bar-by-bar fashion bar-by-bar on the whole portfolio on the historical data. Money of markets. That is, instead of management possibilities have applying a system to all bars of been rudimentary to say the least, market 1, then repeat with market as has portfolio operations, such 2, and so on, a better way to do The Future of System Development – Part 1 as ranking and filtering. These it would be to: apply systems 1 to days, though, more and more TA n to markets 1 to n on bar 1, then programs offer these features repeat on bar 2, and so on. Additional Data – and more, even at a relatively low In the old way of doing things cost. all system-market combos act in The easiest and most intuitive isolation from one another and Better Performance way for the user to handle none of them have any clue what multiple data streams would be the others are up to in regards to to simultaneously have access to indicator values, imminent trades, As computers are becoming faster and faster almost by the day and the amount of data they can handle increases the price data for all markets in a current open positions, etc. With almost at an exponential rate every few years, the type of research a technical trader in general and a systems portfolio, no matter which market the newer approach all system- developer in particular can perform also becomes more sophisticated and computationally intense. A few developers currently happens to be the active market combos are updated bar- of TA software are picking up on this, offering their customers new and improved ways of developing strategies. In one in the TA software. For this to by-bar on everything that goes this article I will explore how to handle parallel multiple data streams, such as other similar markets, indexes and be possible the testing procedure on within all the other combos, interest rates. The programming code is available at the end of this article. needs to follow a completely with each combo having access different path. Instead of the not only to the price data of the order logic being a repetition of other markets, but also current TRADERS´ INSIGHTS 16

and historical indicator values, three percentage points annually, open and closed positions within which, over a 20-year period all systems, other mutually shared would have doubled the account data streams, etc. equity, everything else between One TA program that does all the two tests held constant. this really well at a reasonable The system is a basic volatility- F1) Trading without an Interest price is TradingBlox, although breakout system, applied to 49 other, even cheaper programs, futures markets, an average of such as TradersStudio, also 0.2 per cent of total equity risked continuously improve and add to per trade, approximately $50 the list of these more advanced deducted per contract traded for features. slippage and commission. You will find some sample code for Add Dividend Income TradingBlox on how to do this on One basic example of an added our website. data stream, shared across all In the above example, the markets and systems within a dividend rate data stream is larger strategy, would be the not applied to any individual addition of a short-term interest system-market combination, but The equity growth in this chart does not include any accrued diidend rates, which makes the final net profit considerably lower than that in rate income stream added to the rather to the strategy itself and Figure 2. account equity. Another basic the cumulative equity stream Source: TradingBlox Thomas Stridsman example would be an index generated by all markets. With applied to a portfolio of markets, the possibility to add this extra Mr Thomas Stridsman is a in combination with a trading layer of instructions to the partner of Alfakraft Fonder, rule that could state, “Trade only strategy itself, you also could F2) Trading with an Interest where he manages two those markets that fluctuate the apply some general constants funds (Alfa Commodity and most relative to the index, re- and parameters. Table 3 shows Alfa Energy). He has been evaluate daily (weekly/monthly) the results from the same system, developing strategies for which markets should belong to this time net of a 1 per cent model-based investing since this sub-group”. From a strategy- management fee and 20 per the early 1990s. Prior to joining testing perspective both these cent performance fee, deducted Alfakraft Fonder, Mr Stridsman data streams should be viewed monthly and quarterly from the managed client money in as added more to the strategy cumulative total equity. the FX markets. He also is a itself rather than to any individual freelance analyst and author market or system. Trade against an Index of the two books Trading Tables 1 and 2, and Figures 1 A second example of a shared Systems That Work (2000) and and 2 illustrate the difference in data stream could be the addition Trading Systems and Money performance between a system Adding the possibility of earning dividend income on your account of an un-traded market index equity will not only increase your return, it also will lower your Management (2003). that will not consider dividend against which all other markets drawdowns and decrease time in drawdown. income, vs. one that will. In this compare and trade. In this case Source: TradingBlox case the difference is close to the short-term momentum of all

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 17 individual markets is compared to of two average true ranges is also momentum should work well with the longer-term momentum of the applied. any look-back period between GSCI index. The trading rule for Figure 3 shows a so-called five and 20 days for the traded the long trades (reverse the logic surface chart of the Sharpe markets. F3) Surface Chart of the Sharpe Ratio for the short trades) is to go long ratio for several parameter In this case we made no when the short-term momentum combinations. The red-coloured deductions for commission, for the traded market is below area, which represents a slippage and fees. the long-term momentum of the Sharpe ratio above 1, indicates Figure 4 and Table 4 show the index, on the assumption that the the most profitable parameter equity curve and performance general trend is with the index combinations. It reveals that summary for a version of the and the traded market therefore a 100-day look-back period system with a 15-day look-back will reverse itself. A trailing stop (the vertical axis) for the index period for each traded market and a 100-day look-back period for the GSCI index, applied to T1) Trading without dividend income (see Figure 1) a portfolio of 49 markets over the last plus ten years. In this Modifi ed Annual Max Total Longest Test Ending Balance CAGR% MAR # Trades case the result is net of a $5 Sharpe Sharpe Equity DD Drawdown commission and $35 slippage The Sharpe ratio as a function of the look-back periods for two 1 276,430,515.91 17.48% 0.63 0.95 1.10 27.9% 21.7% 8,691 indicators. The value of the Sharpe ratio is given by the colours in the per contract traded. Again, you chart. Red is high, blue is low. will find some sample code for Source: TradingBlox how to do this as well in the T2) Trading with dividend income (see Figure 2) TradingBlox software on our website. Modifi ed Annual Max Total Longest Test Ending Balance CAGR% MAR # Trades F4) Using an Index for the Entry and Exit Rules Sharpe Sharpe Equity DD Drawdown Position Sizing 1 458,081,676.64 20.39% 0.78 1.09 1.18 26.1% 17.2 8,691 We can modify the above system a bit by using the relationship between the traded market T3) Results Net of Management and Performance Fees and the index as a position- sizing mechanism instead of an Modifi ed Annual Max Total Longest Test Ending Balance CAGR% MAR # Trades absolute trading rule. The original Sharpe Sharpe Equity DD Drawdown trading rule will be substituted 1 233,418,369.85 16.52% 0.61 0.92 1.15 27.1% 21.1% 8,691 with a dual-moving average crossover system with the two moving averages applied only to T4) Testing a Look-back combo of 15 and 100 periods (see Figure 4) the traded markets. First, let us decide on the Using a 15-day look-back period for the primary period together with Modifi ed Annual Max Total Longest a 100-day look-back period for the secondary period produces a Test Ending Balance CAGR% MAR # Trades look-back periods for the reasonable steady equity growth. The look-back periods are derived Sharpe Sharpe Equity DD Drawdown moving averages. Figure 5, from the surface chart in Figure 3. 1 49,428,388.39 16.24% 0.61 0.88 0.80 26.5% 20.5% 5,935 which is a 3D version of a Source: TradingBlox surface chart, indicates that

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 18 a short look-back period of RPT = BR * IM / MM, where: side we have a slightly larger around 45 days combined with RPT = Risk per Trade, in maximum drawdown of 48 a long look-back period of percentage terms of current per cent. Again, some sample three times the length should account equity TradingBlox code for how to alter F5) 3D Version of a Surface Chart be a profitable and robust BR = Base Risk (= the original the trade size by varying the risk enough solution. Figure 6 and 0.35 per cent constantly risked per trade can be found on our Table 5 show the cumulative per trade) website. equity curve and performance MM = Market Momentum Naturally, a drawdown of 48 summary net of slippage and IM = Index Momentum per cent, as in this last example, commission for this system is too much for most of us to version when tested on the Both momentum series will be handle, so this particular system 49-market portfolio. calculated as Close(t) / Close(t-n), and money management idea The initial amount to be risked where (t) denotes today's close still needs some more research. per trade was set to 0.35 per and (t-n) the close n days ago. But the task at hand here was cent of total account equity for A totally flat market will have not to develop a turn-key trading all trades on all markets. Now, a momentum of 1.0, while a strategy, but rather to illustrate let us add a money management market in an uptrend will have a how new research techniques, component to this system. momentum greater than 1.0. The In this case the secondary period is calculated as a multiple of the literally impossible to implement primary period. Setting the look-back periods to 45 and 135 (= 3 x 43) Money management will be above formula indicates that if just a few years ago, now have days respectively seems to work the best. based on the previous relative- MM is greater than IM, RPT will become accessible to most Source: TradingBlox momentum system. It will strive become smaller than BR. For a traders at quite modest costs, to put on larger positions for market in a downtrend it follows thanks to faster computers and those markets that are currently the momentum will be less better software. lagging behind the broader than 1.0 but greater than zero. F6) System with a Basic Position-sizing Algorithm index, while limiting the positions Therefore the formula for how Conclusion for those markets running better much to risk in a short position The possibility of adding than the index. The reasoning will be: additional data streams to the behind this logic is that we strategy itself – rather than to believe that markets that have RPT = BR * MM / IM individual markets or systems – been lagging the index will move makes your testing results more stronger in the immediate future Comparing Figures 6 and lifelike and directly comparable and therefore warrants a larger 7, and Tables 5 and 6 we can to those that you would have risk than the original 0.35 per see that this crude position- obtained had you invested with cent of equity. Markets that are sizing mechanism managed to a professional manager. This is already strong, on the other increase the annual return with especially true when it comes to hand, we believe will move more approximately 1.5 percentage issues such as adding income slowly than the index in the near The equity growth of an ordinary dual moving average cross over points per year (from 14.9 to via dividend rates, which also system with a basic position-sizing algorithm. The look-back periods future, and therefore should not 16.4), which in turn resulted in help you limit your drawdowns for the moving averages are derived with the help of the surface chart be traded as aggressively. an additional $8 million in final and shorten your flat periods. in Figure 5. For long positions the risk per equity. The Sharpe ratio also The possibility to deduct various Source: TradingBlox trade will be calculated as: increased a bit. On the negative management fees also comes

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 19

Info 1: Script Type: Before Test Info 2: Script Type: After Trading Day Info 4: Script Type: Update Indicators

Variables: ErrorCount, FileLoaded_OK Type: Integer Variables: EarnedInterest Type: Money If Min(Instrument.Bar, GSCI_Index.Bar) > RequiredLookBack Then Variables: sSymbol, sErrorMkts Type: String \\ Declares the variable EarnedInterest to be stored within the PrimaryMom = PrimaryMom[1] SecondaryMom = SecondaryMom[1] ErrorCount = 0 software, expressed in currency units (i.e. Dollars, Euros, etc.) \\ If Instrument.close[PrimaryPeriod] > 0 Then sErrorMkts = „“ If IncludeInterestRate = Yes Then PrimaryMom = Instrument.close / Instrument. EarnedInterest = (InterestRate.Close * 0.01)^(1/250) * sSymbol = „F:MM0“ close[PrimaryPeriod] (Test.TotalEquity[1] * 0.9) \\ Find the symbol MM0, which holds the time series for the short- \\ Calculate the momentum for the market (PrimaryMom) by term interest rate, in annual percentage form on the computer used \\ Calculate the daily earned interest as a function of the interest dividing the close of the market today (Instrument.close) by the for this article. For this article we use the 90-day American T-bill. rate expressed in annual percentage and the total equity close of the market n-days ago. The look-back period for the You might have to change the symbol name to combine with your generated so far by the strategy. In this test we assume 90% of momentum calculation is denoted by the variable PrimaryPeriod. \\ data. \\ the total equity can be placed in T-bills at all times. \\ EndIf FileLoaded_OK = InterestRate.LoadSymbol( sSymbol ) Test.UpdateOtherExpenses(-EarnedInterest) If GSCI_Index.close[SecondaryPeriod] > 0 Then SecondaryMom = GSCI_Index.close / GSCI_Index. \\ Load the located symbol and assign it the variable name \\ Update the internal variable UpdateOtherExpenses, built into the close[SecondaryPeriod] InterestRate. \\ software, to keep track of this income stream for further analysis. \\ Calculate the momentum for the GSCI index (SecondaryMom) \\ If FileLoaded_OK < 1 Then by dividing the close of the GSCI index today (GSCI_Index. EndIf ErrorCount = ErrorCount + 1 close) by the close of the GSCI index n-days ago. The look-back sErrorMkts = sSymbol period for the momentum calculation is denoted by the variable Print sSymbol + „ - Failed to Load.“ SecondaryPeriod. \\ Info 3: Script Type: Before Test EndIf EndIf If ErrorCount > 0 Then LongStopLine = Instrument.close - 2*AverageTrueRange GSCI_Index.LoadSymbol(„F:GI“) Test.AbortSimulation( „File Loading Found: „ _ \\ Calculate where to place a stop loss in case of a long trade and \\ Find the symbol GI, which holds the time series for the GSCI + AsString(ErrorCount, 0) _ place that value in the variable LongStopLine. \\ index on the computer used for this article, and assign it the + „ Errors“ + Chr(10) _ ShortStopLine = Instrument.close + variable name GSCI_Index. You might have to change the symbol + „ Create Indices Was Not Successful“ + Chr(10) _ 2*AverageTrueRange name to combine with your data. \\ + „ These Symbols Failed: „ + sErrorMkts + Chr(10) _ \\ Calculate where to place a stop loss in case of a short trade and place that value in the variable ShortStopLine. \\ + „ - Simulation will terminate!“ ) EndIf EndIf

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 20

Info 5: Entry Orders Info 6: Script Type: Before Instrument Day Info 7: Script Type: Unit Size

If Min(Instrument.Bar, GSCI_Index.Bar) > RequiredLookBack Then If Min(Instrument.Bar, GSCI_Index.Bar) > RequiredLookBack Then Variables: EquityAmount, ContractAmount Type: Money If Instrument.Position <> Long and PrimaryMom < SecondaryMom AdjustLongRisk = 1 Variables: TradeSize Type: Integer Then AdjustShortRisk = 1 If Order.Position = Long Then \\ Check whether it is possible to go long. The market should not If UseRelativeMomentum = Yes Then AdjustedRiskPercent = RiskPercent * AdjustLongRisk be long already and the momentum of the market needs to be less MarketMom = MarketMom[1] \\ Calculate how much to risk, in percentage terms, for the next than the momentum of the GSCI index. \\ IndexMom = IndexMom[1] long trade, as a function of the original risk (=0.35%, as stated in Broker.EnterLongOnOpen(LongStopLine) If Instrument.close[MarketLookback] > 0 Then the article) times the adjustment factor for the next long trade.\\ \\ Instruct the software to initiate a long position and pass on the MarketMom = Instrument.close / Instrument. Else price for where to take a loss. \\ close[MarketLookback] If Order.Position = Short Then EndIf \\ Calculate the momentum for the market (MarketMom) by AdjustedRiskPercent = RiskPercent * AdjustShortRisk If Instrument.Position <> Short and PrimaryMom > dividing the close of the market today (Instrument.close) by \\ Calculate how much to risk, in percentage terms, for the next SecondaryMom Then the close of the market n-days ago. The look-back period short trade, as a function of the original risk (=0.35%, as stated in \\ Check whether it is possible to go short. The market should not for the momentum calculation is denoted by the variable the article) times the adjustment factor for the next short trade. \\ be short already and the momentum of the market needs to be MarketLookback. \\ EndIf greater than the momentum of the GSCI index. \\ EndIf EndIf Broker.EnterShortOnOpen(ShortStopLine) If GSCI_Index.close[IndexLookback] > 0 Then ContractAmount = Order.EntryRisk * Instrument. \\ Instruct the software to initiate a short position and pass on the IndexMom = GSCI_Index.Close / GSCI_Index. BigPointValue price for where to take a loss. \\ Close[IndexLookback] \\ Calculate how much one contract will risk in the next trade, EndIf \\ Calculate the momentum for the GSCI index (IndexMom) by given the distance to the trade’s stop loss and the big-point value EndIf dividing the close of the GSCI index today (GSCI_Index.close) of the contract (as specified by the exchange). \\ by the close of the GSCI index n-days ago. The look-back EquityAmount = System.TradingEquity * AdjustedRiskPercent period for the momentum calculation is denoted by the variable \\ Calculate how much to risk in currency terms (Dollars, Euros, IndexLookback. \\ etc.) in the next trade as a function of the current available equity EndIf and the adjusted risk per trade. \\ AdjustLongRisk = Min(Max(IndexMom / MarketMom, 0), 2) If ContractAmount = 0 Then \\ Calculate, in percentage terms, the riks-adjustment factor Order.SetQuantity(0) for the next long trade. \\ Else AdjustShortRisk = Min(Max(MarketMom / IndexMom, Order.SetQuantity(EquityAmount / ContractAmount) 0), 2) \\ Set the number of contract to buy or sell, as a function of how \\ Calculate, in percentage terms, the risk-adjustment factor much to risk of the equity and how much to risk per contract. \\ for the short long trade. \\ EndIf EndIf

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 21 in handy for those desiring to with the established pros. The Scripts for adding market their management skills to pros, too, can use techniques an dividend (interest) rate the public. like this to both add new unique income stream to your system The same can be said for systems to their portfolio of results adding the possibility to base existing ones, and to limit their The dividend (interest) rate is your entries and exits, as well as trading costs through clever loaded into memory from a money management, on each money management and Before Test script then the daily market’s performance relative to position sizing. earned interest is calculated and an index or any other benchmark. added to the equity within an For example, due to trading Scripting Section After Trading Day script. Have a costs, the more money you have For all scripts look at Infobox 1 to see the Script under management, the more The most important lines are type Before Test. Infobox 2 shows your trading might become an marked in bold text and further the Script type After Trading Day. issue of relative rebalancing explained with everything inside between the markets rather than \\ … \\ on the line immediately Scripts for a matter of finding good entry following. Be sure to delete the trading against an index and exit signals. Adding a system explanation lines if you intend The GSCI index is loaded into based on performance relative a to copy the code. Note that memory from a Before Test benchmark can help you achieve TradingBlox works with several script, then two momentum this while limiting the costs for types of scripts which you values are calculated within an slippage and commission. combine to create a complete Update Indicators script, finally In short, working with third strategy. Therefore, the header the orders are created within an data streams is not only line, in bold text, of each script Entry Orders script. invaluable for those private is not a part of the code, but traders and researchers that are indicates which type of script the Scripts for using looking to compare themself code should go into. the momentum of an index for position sizing F7) Using an Index for Position Sizing The momentum of the market T5) System with a Basic Position-sizing Algorithm (see Figure 6) and the index is calculated within a Before Instrument script, which Modifi ed Annual Max Total Longest Test Ending Balance CAGR% MAR # Trades also is used to calculate how Sharpe Sharpe Equity DD Drawdown much to alter the original per 1 43,837,755.36 14.93% 0.33 0.65 0.52 43.3% 21.6% 2,437 cent risked per trade. A Unit Size script then calculates the final risk for the trade and uses that value T6) Using an Index for Position Sizing (see Figure 7) to set the number of contracts to buy or sell. Modifi ed Annual Max Total Longest Test Ending Balance CAGR% MAR # Trades Adjusting the position size for a traded market based on its strength Sharpe Sharpe Equity DD Drawdown relative to an index can increase system performance. In this case with approximately 1.5 percentage points per year. 1 50,369,710.38 16.44% 0.34 0.67 0.64 48.2% 21.5% 2,437 Source: TradingBlox

04/2011 www.tradersonline-mag.com Trading Efficiently as a Business Embrace Efficiency

Have you ever seriously thought about why you trade, or want to trade? In my experience of teaching a number of different groups of clients, the common answer is money. Yet when we discuss the actual process they are using or the lifestyle they are seeking, some distinct contradictions appear. If you are trading purely for the profit, then surely it makes sense to trade efficiently just like any successful business, yet very few people consider this. I was taught in my early days of business to remember that ‘turnover is vanity, profit is sanity and cash is king’ and there would seem to be absolutely no difference in trading. The number of trades taken is no measure of success, there is no championship, no trophy, or peer recognition for taking a thousand trades a week. Come to that, would you get a trophy or any recognition for keeping sane and making profits? If you were to really get down to the nuts and bolts of why trade, it will ultimately, once the smoke clears, be for lifestyle. You never have to commute, answer to an employer, gain authorisation to holiday, fit your life in around a job etc, etc. So the logic follows that to maximise the rewards of trading you need to make your money work efficiently, manage your money effectively and not become engrossed in the action but focused on the results. Using Forex as the location for trading let us consider a few areas for embracing efficiency. TRADERS´ INSIGHTS 23

Which Currency Pair? with money who are prepared Whenever a trade is taken to due to a lack of skill, knowledge, buy or sell at market the spread or discipline to part with that must be considered. This is the money. difference between the price paid When trading currencies, by the buyers and the sellers. The varied spreads depend upon price a buyer will happily pay and the currencies involved, and this the price the seller will happily spread represents a cost to the F1) Daily Charts accept. Just like on Ebay, the business as it must be paid for buyer wants to achieve the lowest at either entry or exit. The price price at purchase and the seller quoted is the bid (buyers best wants to achieve the highest offer) but when you buy at market price, and through the process of you are paying the ask (sellers an auction the most acceptable best accepted) and when you Steve Beaumont compromise is achieved; though sell at market you are paid the whether both parties in the bid price. There is not much you Mr Steve Beaumont was trained transaction are happy with the can do to change this, though Charts with 100 period ATR to identify Range per Entry Pip. by Online Trading Academy compromise is another topic remember that during high Source: www.tradestation.com beginning in September 2006. entirely! Remember when trading, volatility the spread will widen He has studied Stocks, Forex at the time of execution there are and this cost will increase. What and Futures and utilised many two participants, and only one you can do is consider the spread of the Academy’s extensive of them is right. As a zero sum versus the Average Daily Range, T1) Range per Pip Entry Cost support programs. He opened game, trading is about as pure as or think of it as how far can it go his first trading account in March boxing, and with two participants per pip of cost? Try comparing a Currency Spread ATR Range per Pip of Spread 2007 and produced astonishing for there to be a winner there currency that moves on average EUR/USD 1.5 160 107 results. Since March 2008 he must be a loser. For you to make everyday around 70 pips per pip GBP/USD 2.5 153 61 has lived off of his trading and $1000 someone somewhere of entry cost versus one that USD/JPY 1.5 76 51 joined Online Trading Academy lost $1000, so for me the job moves 35 pips per pip of entry EUR/JPY 3 129 43 as an instructor. of trading is to make someone cost, which would you choose? GBP/JPY 5 139 28 poorer. Fortunately there are You can make some comparisons Comparisons of Range per Pip Entry Cost for five popular Forex spreads always going to be participants by simply putting an Average

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 24

True Range (ATR) onto a daily USD then each pip would be Do you review your trading? chart, with the settings changed worth $10. If you made your entry Considering the previously to 100 periods. Changing the just one pip more accurately mentioned topics, it is a settings to this will smooth out this would equate to generating worthwhile activity. Driving your some of the volatility variations $4000 more profit per annum, strategy, rules and methods caused by market disruption, given that the stop was set in the towards efficient effective trading holidays and the like, giving a same place. Take that same trade will ultimately reduce the overall more consistent average. Looking scenario and exit with one more number of trades and increase at the Charts in Figure 1 – Daily pip of profit and you would now profitablility. If you reduce the Charts, and the comparisons of be $8000 more profitable. number of trades, it follows that the currency pairs you are reducing risk. in Table 1 – Range You can get knocked per Pip Entry Cost, down crossing a you can see that the Do you think that to road, therefore the EUR/USD makes fewer times you cross the most sense in make more money you the road the less Range per Pip (RpP) risk there is of being of spread terms. With need to trade more? knocked down! Do each Pip of spread you think that to make having an average more money you range of 107 Pips, and when Hopefully you are keeping need to trade more? In fact once compared to GBP/JPY with statistics of your trades, and an effective strategy is developed, only 28 Pips of range it is, for within those statistics you can you do not trade more, you trade all intents and purposes, four often find 20 per cent of your with a larger position. If you times more efficient. Interestingly losing trades could have been could find one high probability 30 if you carried out the same filtered out. By filtering I mean pip move per week and do this exercise in the first quarter of that a rule could be devised every week, then to make more 2009 you would find that at their which would have prevented money, trade two, four, or even F2) EUR/USD Volatility Cycles in EUR/USD peaks EUR/USD RpP was 107 those trades being taken without ten lots or more to produce the and GBP/JPY was 101, making impacting on whether the income you require. This brings the differential too small to profitable trades would have you back to lifestyle, less time at consider. Adapting to the market been taken. If you had a stop the screen, more time on analysis is certainly a way that you can loss of ten pips and could filter of performance and more time maintain your efficiency. out one trade in ten that hit the to enjoy the freedom that trading stop, in the scenario of 40 weeks can and does deliver. Efficient Entries and Exits of trading, you save ten pips per If you took the scenario of taking week or a further $4000. How When to Trade ten trades a week for forty weeks much time would you spend This EUR/USD 15 minute Volatility Cycles chart shows a 10 period Other factors worthy of ATR. The dashed vertical blue lines highlight the dips in the ATR and of the year this would be 400 refining your trading to improve consideration are time of day and the vertical black lines the London open to New York lunchtime. trades per year. Now if you were your profitability by $12,000 per the day of the week. If we focus Source: www.tradestation.com to trade a single lot of say EUR/ lot per annum? on EUR/USD as an example, it

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 25 is best traded from the London and for a price to turn it must All of which have a 30 pip open through to lunchtime in first stop. It is this stopping point achievable target within them. New York. This is when it is most that you should strive for as your Taking Table 1 in the example active, the moves are stronger entry. Considering the cyclical above, and using a 5 minute and if you can find trades near volatility can help identify the chart you can see how the trade the session open you will be best time to take a trade. Are can set up; see Figure 4 EUR/ trading from low volatility into you struggling with this as a USD analysis of identified London rising volatility. This means entries concept? Look again at Figure open trade. The previous support F3) EUR/USD Trades in the lower volatility, reducing 2 Volatility cycles in EUR/USD, area was at 1.3662 and entry here risk, and rising volatility for take note that the cyclical low is with a ten pip stop would have quicker gains. Figure 2 – very often followed by a strong worked as the price ultimately Volatility cycles in EUR/USD directional move in price as the dropped to 1.3655. With a 1:3 15 minute chart shows a ten ATR increases. So you can find risk to reward ratio we would period Average True Range a slower moving price for entry be seeking at least 30 pips of ATR on a 15 minute timeframe. which results in a fast moving reward. Above the entry the next The dashed vertical blue lines price for faster profitability, and if resistance area is at 1.3697 giving are used to highlight the dips that speed reduces your time in This chart shows potential EUR/USD trades from low volatility at the a clear run to a 30 pip target. London open. in the ATR, with the vertical the market it therefore is reducing Ultimately the price did move black lines marking the day’s your exposure to the risk of an even higher, however, the target Source: www.tradestation.com close to open at 10pm London, event that may cause you a loss. of 30 pips was achieved in 40 5pm New York. The ATR shows Using Figure 3 EUR/USD minutes and the rest of the day is the cyclical nature of volatility trades from low volatility at yours. This trade met the criteria and highlights the suggestion London open, which at the of trading from low volatility F4) EUR/USD Trade Analysis that trading should ideally be time of writing is the latest data into rising volatility, achieved its considered from London open available for the EUR/USD, we target and excessive risk was to New York lunch (5.30pm can see this analysis and the not required. Perhaps now you London). potential trades. The ATR is set need to work on an entry signal How can this help? Simply at ten periods on a 15 minute to maximise entry efficiency and put, do you want easier low risk chart, and you should be able to reduce the risk? entries or harder high risk difficult see that just as the ATR starts to entries? When is the easiest rise a strong move develops. This Conclusion time to catch a bus? When it is move is typically between 7am In summary, take trading stationary at the bus stop! You and 8am London. All of these seriously, keeping results logged can try to catch it as the bus moves started from a recent for future reflection and you will goes by on the street, but the Resistance or Support line and be able to identify your next risk of injury is somewhat higher if you measure the range of the step to trading effectively and and the probability of success move you will get the following efficiently. somewhat lower! When is the EUR/USD analysis of an identified London open trade. Entry at results: previous support of 1.3662 with a ten pip stop and at least 30 pips of easiest time to catch a trade? reward to the next resistance area of 1.3697. When the price is moving slowly Trade (T) 1 = 67 pips, T2 = 98 Source: www.tradestation.com and can easily change direction, pips, T3 = 44 pips, T4 = 39 pips

04/2011 www.tradersonline-mag.com Active Traders: Take Your Trading to

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Steve Ward ...and more! 27

EQUITIES

The Premise: Different Markets pairs will react to movements Appear to be ‘Connected’ in U.S. stock markets. You may One of the things about the see the S&P Futures breaking FOREX equities markets which we can through resistance and then that do to help put the odds in our becomes the catalyst to cause favour is to look at the correlation the major currency pairs (i.e. between various indices, sectors EUR/USD, GBP/USD) to move up and stocks. For example, if you sharply as well. are trading stocks, perhaps you So, the question of course is, will look to see that the S&P, DJIA “Why should I care,” or “How and NASDAQ are all ‘doing the can I use this information to same thing’ (i.e. bouncing out my advantage?” Consider the of a demand zone, entering into correlation between currency a supply area, in an uptrend or pairs to each other and, downtrend, etc…) and then look depending on when you are to see that the stock you are trading Forex, the correlation about to trade is reflecting the between the U.S. stock market Who with Whom? movement of the overall indices. and the currency pairs as another The logic for this being that if odds enhancer. The argument the stock is moving with the can be made that prior to How to Use Correlations in overall market, you are swimming entering a trade in Forex, as an with the current as opposed to additional piece of the puzzle, against it – thus increasing your look to see if the currency pair the Forex Market probability of success. you are considering is acting in a In the Forex market, the correlating fashion. same correlation issue exists. In my last Forex article (TRADERS´ 02/2011), I made the argument that there are many similarities between the equities For example, many times, The Flash Crash: and Forex markets in an attempt to dispel the idea that the Forex markets are ‘mysterious.’ We are essentially seeking different currency pairs will Prices Dropped to to accomplish the same things in the Forex markets as in the equities markets – many times we are just using different move in conjuntion with each ‘Random’ Levels? I Think Not terminology. We identify demand and supply zones in both markets using many of the same indicators, and we adhere to the other. Many times, you will What really is quite fascinating same money management principles. notice that the major currency is how so many markets are in

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essence one gigantic flowchart. pairs) move as well when the Remember what happened on ‘flash crash’ took place? Yes, it May 6, 2010? That was the day did. Notice how the EUR/JPY we experienced what became dropped to historically important known as the “flash crash.” What levels before rebounding. Do exactly transpired? Well, the you see a pattern? The markets markets – equities, Forex, futures, appear to be connected. etc dropped suddenly and quite All right, so we have dramatically in an unprecedented established that markets have manner for a while – only to a tendency to move with each recover most of those losses other at times. Additionally, later in the day. Now, some some currency pairs have a F1) Monthly Chart of Dow Jones Industrials will contend that the markets tendency to move with each bottomed at completely random other much of the time (i.e. levels. However, taking the time to EUR/USD, GBP/USD). As conduct a bit of research reveals evidence of that, the next time something rather interesting. you pull up charts on various Remember, this downward move currency pairs, notice how the was sudden and dramatic, but overall trend of many of them yet the levels where various is clearly in the same direction markets bottomed appeared to much of the time. It would also be at significant price points – make sense that if the two The blue line represents the low the Dow Jones Industrials hit on the day of the ‘flash crash’. Notice how it corresponds to historically actually, levels which had acted aforementioned currency pairs significant price levels dating back years prior on this monthly chart. historically as major support and (EUR/USD and GBP/USD) are Source: www.tradestation.com Eric Waddell resistance levels. Let us look at moving up, then the USD/CAD, some examples (Figure 1). for example, must be moving Mr Eric Waddell has been The average opened at 10,862 in an overall opposite manner trading for over ten years and and then plummeted to 9869. during the same period of time F2) Monthly Chart of the EURJPY teaches with Online Trading Now, on the surface, this would ,simply because the U.S. Dollar Academy. He has developed appear to be a completely is on the ‘opposite’ side. various strategies in the random price level where the equities and Forex markets, DJIA bottomed. However, upon How to Potentially Use which he has shared with closer inspection, it actually Correlation to Your Advantage students in various parts of bottomed and bounced off of a So, one thing you may consider the world. Eric truly considers historically important level. is waiting for currency pairs it an honor to instruct with What does this have to do with which normally correlate to Online Trading Academy and the Forex market? Well, it is all move in the same direction encourages his students to about correlation. The blue line shows the low of the EUR/JPY on the day of the ‘flash prior to placing a trade. What if crash’ – looking back over ten years prior that same general area stay in touch with him. Take a look at Figure 2, the you notice that the EUR/USD represented a historically important price level. chart of the EUR/JPY. Did it is moving down while the GBP/ Source: www.tradestation.com (along with many other currency USD was clearly moving up? If

04/2011 www.tradersonline-mag.com TRADERS´ INSIGHTS 29 you were considering entering a market indices or the S&P if three of the four are through trade short on the EUR/USD, you Futures are trading in relation then the last will follow. What I might want to wait until you have to support and resistance and always do prior to a trade is look correlation between the GBP/ what their overall trend is to see to see that all four of those are in USD and the EUR/USD prior if there is correlation with the agreement and if not, which one to pulling the trigger. There is a major currency pairs. You do is the straggler that is holding possibility that the GBP/USD will, not have to look at every single things up. Sometimes, by virtue in effect, pull the EUR/USD up currency pair which exists – of just one of the ‘big four’ not with it – so waiting for correlation simply examining the four I have being through resistance or between the two would be the mentioned should suffice. What support as the other three have prudent decision. We all know you are doing is again – putting done can cause your trade in one that ‘patience is a virtue’ and in the odds in your favour and as of the other three pairs to stall. trading it definitely can pay off for we know, trading is all about Keep in mind that regardless F3) GBPUSD 60 Minute Chart us. probabilities. of the timing of your entry – Does this work every time? Of If you are considering entering whether you are waiting for final course not – there are always a trade long on the EUR/JPY confirmation – or just playing the exceptions. Could you see the because it has broken through odds that all four will eventually GBP/USD and EUR/USD moving resistance and you notice that be in agreement – a stop must be in the opposite direction – yet the GBP/JPY and EUR/USD used to mitigate your downside. still make a profit on your trade? are both through resistance as Always be cognisant of your Yes, but it is all about odds. well but the GBP/USD is having position size and focus on how Personally, I take things a little some challenges breaking much you can potentially lose on further. My favourite time to through its resistance and is a trade instead of simply focusing Notice the times that this spread pausesand reverses. trade Forex is between 6:00 pm coming down from it – then you on the profit. Source: www.tradestation.com – Midnight Eastern Time. What may consider executing some I like to do – and you may feel patience and not entering the Conclusion compelled to try this as well – trade until the GBP/USD has Markets are connected – check is examine four currency pairs retraced to the resistance and it out for yourself. Watch how F4) EURJPY 60 Minute Chart in particular: EUR/JPY, GBP/ finally broken through. Now, that various markets and various JPY, EUR/USD and GBP/USD. would obviously be the more currency pairs – which on I want to ensure that all four are conservative move, but could a cursory glance might not doing the same thing prior to you conclude that since three of appear to be related – in placing a trade. In other words, the ‘big four’ as I call them are fact, often move in the same I want all four of them to have through resistance, that the one direction and can provide that cleared resistance or support and last straggler will break through one last bit of confirmation have the same overall trend, for eventually as well? Of course, you prior to pulling the trigger on example (Figure 3 and Figure 4). could wait for the confirmation your trade. If you are trading Forex during Notice how the EUR/JPY pauses and reverses at about the same – which would be the GBP/USD times as GBP/USD in Figure 3. the regular U.S. stock market breaking through – or you could hours, I would also recommend anticipate what would occur Source: www.tradestation.com identifying how the major stock based on the probability that

04/2011 www.tradersonline-mag.com TRADERS´ TOOLS 30

PRODUCTS PRODUCTSNEW With the launch of their T3 Bank. The bridge offers straight- is by volume, the same model Bloomberg Professional News coverage, Execution Bridge last October, through processing of trades and used by ECNs. Mr. Håman says service executives announced analytics and Fair Trading Technology (FTT) a transparent order reporting that the speed of transactions is the launch of a Bloomberg search tools of more felt like they were really bringing not compromised but in fact Islamic Finance Platform than 1500 Islamic bond something unprecedented Fair Trading Technology (FTT) minimised by FTT’s Zurich- (ISLM), a comprehensive issues globally including to the FX marketplace: true based cloud computing which solution designed to increase fatwa endorsements and transparency. It sounds is used as a trade passes from transparency, better connect structured diagrams of the obvious, but prior to last year, their MT4 server platform to the community and provide financial instruments. 2. Equities technology to allow forex the T3 bridge and through analytical tools to maximise & Funds – Screening of over traders to verifiably see that to Dukascopy. Order routing investment performance in 35,000 Shariah-compliant their orders are making it to the is kept at higher speeds, the rapidly growing market for stocks by prominent screening open marketplace in a timely minimising slippage on the Shariah-compliant products agencies. Database of more fashion really had not been majority of orders. For more and services. Bloomberg also than 500 Islamic funds with widely available. This issue is information, please visit announced, in cooperation ability to research and monitor one that was not lost on Fair http://bit.ly/fd8jiD with the Association of debt, commodities, equities and Trading Technology CEO Tim Islamic Banking Institutions exchange traded funds (ETFs). Håman when he first began system. The technology was The online broker Zecco has Malaysia (AIBIM), the launch 3. Islamic Community Database: working with the FX industry designed by traders, for traders introduced Mobile Lite for iPhone. of a Malaysian Ringgit (MYR) Providing full transparency back in 2008. Mr.Håman says looking for transparency, ECN Now users can monitor their sukuk index to provide a into more than 250 Shariah he quickly realised that while the liquidity and fast execution Zecco Trading account and benchmark for MYR sovereign scholars with details on which industry standard tool for forex while using their preferred the financial markets wherever sukuk investments. The new sukuk they have rated, boards trading, MetaTrader 4 (MT4), platform. More recently, FTT they are, from their Apple Bloomberg ISLM platform has they represent and their fatwa was a good, useful platform, has upgraded the T3 Bridge to iPhone and iPod Touch. The extensive resources for investing endorsements. 4. Regional it also presented some real be fully bi-directional so orders new Zecco Mobile Lite app specific content: Carrying issues for traders. “There was no can be executed from either MT4 features blazing speed and Zecco the Malaysia International transparency and traders were or Dukascopy’s Jforex client a clean and simple design. Islamic Financial Centre (MIFC) unable to tell whether their orders software. “This makes it easy With Zecco Mobile Lite you initiative‘s content, developed were reaching the market, which to utilise the best features of can view your portfolios and in collaboration with Bank was adding to the risk involved,” either of the trading platforms watch lists on a single screen, Negara Malaysia and other said Mr.Håman. “It was clear that and ensures honesty,” said use advanced charts to find MIFC community members; what was really lacking in the Mr.Håman. new investment opportunities, providing insights on Shariah, market was a bridge between Additionally, the two-way bridge keep tabs on the day’s financial MIFC business opportunities MT4 and the ECNs.” is the world’s first where orders news and market movers, and key developments; FTT’s solution was to build can benefit from full market depth tap into the ZeccoShare and listing the more than the T3 Execution Bridge, the over nine liquidity layers and community for investment 90 community members first technology to offer a fully where the partial fill problem is insight, and receive stock alerts for business connections. transparent MT4 to ECN solution, resolved, supporting orders from via push notifications. For more in fixed income, equities and For additional details, please partnered with the world’s largest 1000 to 250,000,000 in currency information, please visit money markets that comply visit www.bloomberg.com/ ECN, Switzerland’s Dukascopy per order. Pricing for the service www.zecco.com with Shariah including: 1. Sukuk: professional

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PRODUCTS PRODUCTSNEW

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04/2011 www.tradersonline-mag.com TRADERS´ TOOLS 32

BOOKREVIEW

7 Winning Strategies for Trading Forex Real and Actionable Techniques for Profiting from the Currency Markets Grace Cheng

Many traders in the forex markets sentimental analysis, which and by implementing careful go around searching for that she uses in her trading. This money management. The one perfect trading strategy that knowledge makes her the ideal opening sections of the book Title: 7 Winning Strategies for Trading Forex works all the time. Frequently, guide to the world’s most liquid explain this more clearly, with a Subtitle: Real and Actionable Techniques they complain that a strategy . Her book is detailed analysis of the unique for Profi ting from the Currency Markets does not work, but few actually split into two parts; the first looks characteristics of the forex Author: Grace Cheng understand that successful at the basics of forex trading markets – for example, its lower ISBN: 9781905641192 trading requires the application and explains how to spot the costs and unparalleled liquidity. Price: £19.99 of the right strategy for the right structure of the markets, whilst Cheng then goes on to look at Publisher: Harriman House market condition. the second goes on to explore opening an account, covering About the author: BOOKREVIEW Grace Cheng’s book ‘7 Winning the seven trading strategies and the basics of how to read the Grace Cheng is an investor and FOREX Strategies for Trading Forex’ is demonstrate how and when they markets through to choosing trader, and is the co-founder and chief editor of DailyMarkets.com – a fi nancial community an invaluable book for new and should be used. the correct broker. This section weblog dedicated to 24/7 breaking news and current traders alike. Highlighting will serve as an excellent market opinions from traders, money managers and investors. Inspired by veteran investor Jim seven trading strategies, each of Opening Section reference tool for beginner and Rogers‘ adventurous spirit of travelling around the world, in 2007 and 2008, she fulfi lled her which is to be applied in a unique As Cheng explains, the forex experienced traders alike. dream of travelling around the globe from way and designed for differing markets have the promise of Before going on to look at the the US, South America, Europe to Africa and Asia for a year, without missing a day of work, market conditions, Cheng fast action and huge profits, trading strategies in more detail, proving that in this day and age, one can shows how traders can use the but the risks are also great. Cheng gives her top ten rules for achieve fi nancial independence without being tied to an offi ce chair. various market conditions to ‘It is estimated that over 90 trading the forex markets. Many Grace is a contributor to major print, radio and television media including Technical their advantage by tailoring their per cent of forex traders end forex traders would do well to Analysis of Stocks & Commodities, Your Trading strategies to suit each one. up losing their trading capital’ remember these rules, axioms Edge and Investopedia. She has also been featured in the media in the US, UK and Asia As an experienced, full-time Cheng warns, but these losses that embody wisdom which can and quoted on Reuters and Dow Jones. Her forex trader, Cheng is well-versed can be avoided by taking the often be forgotten when caught popular online PowerFX Course has taught in technical, fundamental and time to learn how to trade up in the momentum of a trade. thousands of traders worldwide.

04/2011 www.tradersonline-mag.com TRADERS´ TOOLS 33

Part 2 crucial to your trading success, exploiting it appropriately can Another of Cheng’s seven deciphering whether news is The second part of the book she explains, as ‘ultimately, help you maximise your trading trading strategies is news bullish or bearish, but to trade the is taken up with exploring the the trader is dealing with other profits. She goes on to explore straddling. This is particularly market quickly without slippage. seven trading strategies in more traders out there and needs to what factors can affect this profitable if you know when detail and examining how and know what they are thinking.’ sentiment and uses an example and how to enter (and exit) the Conclusion when they should be employed. She goes on to explain that what of the New Zealand dollar and market. As she points out, the The book concludes with a useful The first of these chapters the market is thinking or feeling Japanese Yen from 2005 to forex markets are sensitive to the forex glossary and a breakdown looks at market sentiment and is the most important factor that illustrate the point when the flow of news. Traders should have of the currency codes. Filled focuses on how a trader can drives the currency market and New Zealand dollar rose in value access to the latest up-to-the- with practical advice, ‘7 Winning better understand the market that there are three main types of against the Japanese Yen. This second news so as to facilitate Strategies for Trading Forex’ is an and use that knowledge as a sentiment: was as a result of strong interest their trading decisions – all invaluable book for both new and formidable trading weapon. among Japanese investors to of which have to be made at experienced traders and a must- Cheng explains that the forex 1. Bullish invest in New Zealand dollar- lightning speed. Cheng explains read for those who want to know market is alive as a kind of social 2. Bearish dominated assets due to rising the strategy step-by-step and how to make money in the forex organism, within which a vast 3. Just plain confused interest rates there. The graphs then goes on to illustrate it with market. number of market participants clearly show the direct correlation examples of responses from the act out their perceptions and Cheng’s main point here is that between market sentiment and GBP/USD market, when major emotions. Knowing what the understanding when and why the way this can affect what the news releases have come out. market thinks and how it thinks is the market is feeling like this and market is doing. The idea is to not waste time

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7138 AW.indd 1 07/03/2011 09:18 Successful Management of Trading Portfolios A Secret of Funds Managers

The human brain is the most wonderful object in the universe. One thing it can do – in addition to myriads of awesome achievements made by it – is that wealth can be built by it regardless of the uncertainties of the future. Necessity will forever be the mother of invention. The unpredictability and uncertainties of the financial markets have led to the development of some permanently successful trading techniques. Top traders do not have any special secret: their long-term survival lies in effective risk control and reasonable position sizing. Here lies before you a profitable trading strategy for swing and position traders, used in managing trading portfolios, and of course resulting in decent profits on an annual basis. Yes, this should be music to your ears! TRADERS´ STRATEGIES 36

Strategy Snapshot

Strategy name: Trend Signaler Suitability: Good for part-time traders Approaching the you may use a pending order. If Strategy type: Swing cum position trading Markets with the Strategy your predetermined entry price is Time horizon: Daily charts This strategy, which is very not reached, then the order would Indicator 1: Simple Moving Average (SMA) suitable for part-time traders, not be filled and it would later be Indicator 2: Relative Strength Index (RSI) gives you an update on some of cancelled. In my personal trading Indicators parameters: SMA 20 period and RSI 20 period the movements on the markets analyses, the status of a position Instruments: AUD/USD, NZD/USD, EUR/AUD, EUR/CAD, EUR/NZD and AUD/JPY and what you could do about is either open, closed, pending or Buy rule: Buy when the price closes above the SMA and the RSI is them. The analyses are based cancelled. above level 50 on daily charts, looking at the This system is effectively using Sell rule: Sell when the price closes below the SMA and the RSI is Big Picture. The recommended the Simple Moving Average (SMA) below level 50. leverage is a maximum of 1:100 to determine the direction of Orders types: Pending orders and instant executions and the recommended position the trend and the RSI (Relative Exit rules: Exit a long position upon generation of a valid ‘sell’ signal. size is 0.01 lots for each $1000. Strength Index) to confirm it by Exit a short position upon generation of a valid ‘buy’ signal. And exit when your initial stop or trailing stop is hit. The maximum drawdown in a buying at a wholesale price and Stop loss: 100 pips from the entry price week is two per cent (worst case selling at a retail price – buying Trailing stop: Initial trailing stop of 100 pips (see the section for risk scenario). Primary positions are rumors and selling confidence. management) Mustapha Azeez opened without a predetermined A bearish bias is assumed Position sizing: 0.01 lots for each $1000 available (thus making it 0.1 exit target in mind, riding the whenever the RSI is below the lots for each $10,000) Mr Mustapha Azeez is a pro- trend for as long as it continues. level of 50 while the bias turns Risk per trade: 1% Safety rule: Trading is stopped for the week if drawdown reaches fessional Forex trader, Forex It makes sense to enter the bullish whenever the RSI moves 2% (worst-case scenario). signals strategist, funds mana- market on the day following the above the level of 50. In order to Average number of signals: About ten to 35 valid signals per month ger, and researcher. generation of a signal. If you are allow consistency, the SMA and Average hit rate: 60% on a long-term basis available in person, you may use the RSI have a value of 20 each. Average annual returns: 35% to 70% per annum an instant execution. But if not, The six exotic pairs and crosses

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 37 we choose are more easily (50 per cent of the profit). If you That is all that has to be done. predictable than the major pairs. gain up to 300 pips, you lock 150 There are no special secrets. This We do not need to fall in love pips. If you gain 400 pips, you is a way of disciplining yourself to with any pairs as our aim is to then lock 200 pips. It is all about follow these simple rules. Trading make profits from trading. Just for locking 50 per cent to 65 per cent is like entering a battlefield and your information, the movements of any profits you make, starting preparing for the worst. If you on EUR/AUD and EUR/CAD in from 200+ pips, while giving have this mindset, you will not particular are easily predictable enough room for the market to want to risk too much. F1) The EUR/CAD in a Sustained Bearish Mode with over 70 per cent accuracy. run. This locking can be done For instance, from December by applying automatic trailing Some Former Trades 2009 to May 2010, the EUR/CAD stops in your system or moving Let us look at a few recent trades. fell by over 3000 pips. The spread your stop manually. The worst Please refer to the charts that of each exotic pair is higher than drawdown per trade should not accompany this article. The red the spreads charged on the major exceed one per cent (we may not line above (which stays close to pairs, but the use of the exotic even wait till the stop is hit before the price movement) stands for crosses makes sense since we are we exit, perhaps exiting before the SMA and the blue line below going for hundreds – sometimes -100 pips and limiting the risk stands for the RSI. Please note thousands of pips – per trade. to less than one per cent), and when the blue line went below the Another advantage is that we have the predetermined worst-case The Canadian dollar gained remarkable strength against the Euro. The level 50 and when it went above latter was generally weak for several months. The trade was entered as fewer signals and therefore, pay scenario per week is two per cent it. The red vertical line on the left soon as a valid bearish signal formed, and it was managed according much less in spreads. drawdown. shows where a trade was entered to the predefined rules. The trade was decently profitable. Sun Tzu, the ancient Chinese and the red vertical line on the Source: www.metaquotes.net Application of military general, strategist and right shows where it was exited. Sound Risk Management philosopher who authored the This is my risk management book “The Art of War”, once Example 1: recommendation for this trading said “He who knows when he From December 2009 to late F2) The Aussie Rallies against the Greenback strategy, as it is used on AUD/ can fight and when he cannot, June 2010, the Canadian dollar USD, NZD/USD, EUR/AUD, EUR/ will be victorious.” Let us say gained remarkable strength CAD, EUR/NZD and AUD/JPY: that upon accumulation of 15 against the Euro. The latter Once you have gained up to 100 per cent profit, you may stop was generally weak for several pips, you simply move your stop trading in a week in which your months. When the market is in a loss to breakeven i.e. to your profit drops to 13 per cent. With strong trending mode with huge entry price (thus eliminating the this safety approach, you avoid euphoria, support and resistance risk on the trade). A stop reaches further drawdown in a bad week, levels would be blown through a breakeven when the entry because there are weeks when like a hot knife through warm price equals the stop order level: both buyers and sellers would be butter. something that makes you exit From September to November 2010, the AUD/USD moved up by well stopped out of the market. A loss over 1000 pips in roughly 45 days. The Aussie eventually came to with no profit or loss in case of a of two per cent is enough to warn Instrument: EUR/CAD parity with the Greenback. The advantage of this scenario was taken. crazy movement against you. us to stay away from trading in a Order: Sell It was a clean and successful transaction. Then if your profit goes up to particularly bad week. Sometimes Entry date: December 7, 2009 Source: www.metaquotes.net 200 pips, you may lock 100 pips the markets can be a wild beast. Entry price: 1.5699

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 38

Initial stop: 1.5799 Example 3: Instrument: EUR/AUD Trailing stop: 1.3686 Here is an example of how a Order: Buy Exit date: June 24, 2010 trade that was initially good Entry date: December 23, 2009 Exit price: 1.2790 could turn against the trader and Entry price: 1.6283 Profit/loss: 2959 pips how it might be controlled. This Initial stop: 1.6183 caused the trade to be exited at Trailing stop: N/A Example 2: breakeven. Good traders should Exit date: December 29, 2009 From September to November be able to move ahead despite Exit price: 1.6183 F3) A Trade on the AUD/JPY Broke Even 2010, the AUD/USD moved the uncertainties that the financial Profit/loss: -100 pips up by well over 1000 pips in markets will throw at them. roughly 45 days. However, The entry criteria were met and Conclusion some of the pips were given up therefore we entered short with “The system that performs on an assumption of a serious a pending order on the following well tends to have a reliability but temporary southbound day. The price moved down of around 40 per cent and has journey by the pair. At the by over 125 pips (the stop was average gains that are much time of preparing this article, moved to breakeven when the larger than the average losses,” the Aussie eventually came to profit reached 100 pips) before it writes Dr. Van. K. Tharp. “Yet parity with the Greenback. The turned bullish. most people look for systems market has been volatile since Here is an example of how a trade that was initially good turned against with a high probability of winning, the trader and how it was controlled. Our entry criteria were met and then; presenting numerous Instrument: AUD/JPY which is totally different. For we therefore entered short with a limit order on the following day. The price moved down by over 125 pips (the stop was moved to breakeven opportunities for swing traders Order: Sell stop example, you can have a method when the profit reached 100 pips) before it turned bullish. to make hundreds of pips. The Entry date: November 29, 2010 that is right 80 per cent of the Source: www.metaquotes.net AUD/USD needs consistent Entry price: 80.90 time and that still will not make movement above the 1.0000 Initial stop: 81.90 you money. Why? The reason level for the primary bullish Trailing stop: 80.90 is because the gains are small trend to remain effective, Exit date: December 1, 2010 and the losses are large. A lot F4) A False Signal on the EUR/AUD otherwise a new bearish trend Exit price: 80.90 of people are attracted to such would resume. Note that earlier Profit/loss: 0 pips (breakeven) systems, but they will usually trades on this pair would have result in financial disaster.” Please had a measure of success with Example 4: do not forget: abort your losers effective risk management. There is a need to show a and ride your winners. If you could place where the strategy failed do this with enduring patience Instrument: AUD/USD – causing a loss that was and perseverance, the strategy Order: Buy satisfactorily bearable. This described here would make you Entry date: September 2, 2010 example shows a trade that went achieve consistent survival on the Entry price: 0.9108 negative not long after a long markets – something you have Initial stop: 0.9008 This example shows a trade that went negative not long after a long order was opened. The risk was been dreaming of. order was opened. The risk was adeptly brought under control, causing Trailing stop: 0.9643 adeptly brought under control. a loss that was satisfactorily bearable. The subsequent bearish signal Exit date: November 15, 2010 Note that the subsequent bearish on the cross would have been successful if taken. Exit price: 0.9869 signal on the cross would have Source: www.metaquotes.net Profit/loss: 761 pips been successful if taken.

04/2011 www.tradersonline-mag.com Learn How to Trade with Precision Getting an Edge on the FX market

All trends must pull back or retrace at some point before a currency goes on to make higher highs or lower lows. Up to this point, the discussion has focused on trading breakouts in the direction of the trend. This article first introduces advanced trend following techniques such as Directional Indicators and multiple timeframe analysis. The focus then switches to a strategy for entering on the pullbacks within the trend for a very precise and high probability FX trading strategy. TRADERS´ STRATEGIES 40

ADX Indictor for • The DMI is derived by Advanced Trend Analysis comparing the range of the The ADX (also known as current period with the previous F1) ADX – Example Directional Movement) is a trend periods range. This will result in following or directional indicator. a positive or negative value: It helps to keep you on the right • The Positive DMI or +DMI side of the market and in the indicates that buyers are in strongest trends. In addition to control, pushing the market this, the ADX will also show you higher. +DMI is usually coloured when the market is ranging and green. therefore should not be traded. • The Negative DMI or -DMI By understanding the ADX, indicates that sellers are in you will know who is currently control, pushing the market controlling the market in any lower. -DMI is usually coloured Image A shows a downtrend, confirmed by a rising ADX with the red DMI over the green, indicating that sellers are in control. Image B shows timeframe –buyers, sellers or red. an uptrend, confirmed by a rising ADX with the green DMI over the red, indicating that buyers are in control. Image C is a ranging market that neither. • In the illustrations, the blue line should not be traded. This is confirmed by the ADX reading below 20 The mathematics behind the is the ADX line (see Figure 1). and no clearly indicated winner between buyers and sellers. ADX indicator is complicated. • The ADX is calculated by Source: www.esignal.com Remember, you do not need to combining data from both know how the parts under the the +DMI and -DMI and then hood of the car work in order to smoothing the data with a know how to drive the car! The moving average. T1) Timeframe following information will allow • The range of the ADX is Precision you to ‘drive’ the ADX indicator: between 0 to 100 and the Low Timeframe Mid Timeframe High Timeframe Nick McDonald higher it rises, the stronger the Chart • The ADX is derived from a trend. Scalping 5 15 30 60 Day Trading 15 60 240 Daily Mr Nick McDonald is an inde- combination of two other • Important note: The ADX will Swing Trading 60 240 Daily Weekly pendent full-time trader. indicators named DMI rise in both an uptrend and a or Directional Movement downtrend. A rising ADX shows All timeframes are minutes unless otherwise specified. For example, 240 minutes equals four hours. Indicators. you that there is a trend, the

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DMI lines confirm whether that Confirming with Multiple down trend on your low and trend is up or down. Timeframes – ADX Plus mid timeframes that looks Convergence & Divergence tradeable. However, upon F2) Fibonacci Line in Downtrend ADX Trading Rules Trading with Multiple Timeframes checking your high timeframe Look for long trades when: refers to the technique of you realise that the currency is 1. The green DMI is above the red looking at various charts in approaching a major support DMI (confirming buyers are in different timeframes in order level and therefore you should control). to gain greater knowledge and not look to trade short until this 2. The ADX is rising and is above an understanding of the overall level has been broken. 20 (indicating strong uptrend). trend and thus the validity of the 3. The price action is trending trade. While a trend may look 3. Look for convergence and/ up (Higher Highs & Higher strong in one timeframe, it may or divergence between price Lows). show divergence and weakness and indicators in your mid and in another. The timeframes high timeframes to confirm that This criteria is illustrated in Figure that traders choose to trade in you are trading with market 1 B. depend on their personality, momentum. trading skill and lifestyle. Look for short trades when: For example, 240 minutes In a downtrend, you should start the Fibonacci line from a high and 4. Use Mid and High Timeframes draw it down to the most recent low as indicated by the start point to 1. The red DMI is above the green equals four hours. The high to: the end point illustrated. The move down is 100%. As the price starts to retrace back up, it may find resistance at the Fibonacci retracement DMI (confirming sellers are in timeframe should be used to levels highlighted. control). assess major trends, patterns, • Assess direction of trend Source: www.esignal.com 2. The ADX is rising and is support and resistance. The mid and its strength using highs, above 20 (indicating a strong timeframe is used to confirm the lows, convergence, divergence downtrend). trend that you should be trading and the ADX. F3) Fibonacci Line in Uptrend 3. The price action is trending with as well as any patterns and • Check support and resistance down (Lower Lows and Lower support/resistance levels. levels to ensure that you are Highs). The low timeframe provides aware of all major levels. you with your trade setups and This criteria is illustrated in Figure you should then use the Precision 5. Once you establish a valid 1 A. chart (aka trigger or entry chart) trend direction to trade with, to time your entry into a trade. look to your low timeframe and Do not trade when: the Precision chart to find a 1. The ADX is below 20. Multiple Timeframe Rules suitable entry strategy. 2. An ADX reading below 20 1. Ensure that all timeframes indicates that the market is agree. For example, when all In an uptrend, you draw a Fibonacci retracement line from a low point Locating Clusters up to a high point. To locate Fibonacci clusters, you should draw the ranging or trendless. timeframes are trending up it What is a Cluster? The Collins line from a different start point as indicated at point 1 and 2 and finish at the same end point 3. You then look to see if any of the retracement 3. There is no price action trend indicates to look for a long entry. English Dictionary defines a levels cluster at the same level. In the example above the 38.2% between the highs and lows. cluster as ‘a number of things retracement for the larger move up, perfectly clusters with the 50% 2. Ensure that there is no reason occurring close together’. In the retracement level for the shorter-term move at 1.9200. This criteria is illustrated in Figure not to enter your trade. For case of FX chart clusters, ‘things’ Source: www.esignal.com 1 C. example, you have a strong means levels of support and

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 42 resistance which are all occurring and be drawn down, to the most good idea by seeing if any other on a currency chart very close recent low (see Figure 2). In an Fibonacci levels or other S&R together. Generally, these multiple uptrend, the line must start from levels cluster at the same price support and resistance levels a low and be drawn up, to the point. should be occurring within zero most recent high (see Figure 3). to seven pips of each other. The The line can start from any actual Fibonacci Clusters factors that you should consider high or low on the chart provided To locate Fibonacci clusters you when looking for clusters in it ends at the most recent high should always start the line from foreign exchange are: or low as described above a different start point and finish (starting from different points is at the same endpoint. Once you 1. Price action support & how you will find clusters). This have done this you can see if any resistance (S&R) ensures that you are looking for a levels cluster at the same place. 2. Fibonacci retracement levels retracement of the current trend. See Figure 3 for an example of a 3. Pivot Points – daily, weekly and Most software will have a Fibonacci cluster. monthly built in Fibonacci drawing tool. 4. Big numbers – 00’s and 000’s You simply have to draw a line Pivot Points – as described above and then Daily, Weekly and Monthly When two or more of these it will automatically calculate Pivot points are leading indicators factors cluster within seven retracement levels that may as they help you to predict pips of each other it builds a support or resist the price if it the range plus support and F4) Pivot – Example very strong level of support or reaches those levels. resistance levels for the next resistance. The more of these The Fibonacci retracement trading period. A period in the factors that cluster at the same levels that you should look at are case of foreign exchange pivots level and the closer together they 38.2 per cent, 50 per cent, 61.8 can be a day, week or month. are, the stronger that level is likely per cent and 78.6 per cent. The By using the mathematical to be and the more likely that price move that you originally calculations below, you are able price will not penetrate if tested. drew from a low to a high is 100 to forecast five separate support per cent of the move. This means and resistance levels that price Fibonacci Retracement Levels that if the price starts to pullback may react to in the next trading Fibonacci lines should be drawn it may find support as it pulls period. The calculations are from a low up to a high in an back 38.2 per cent or 50 per cent as follows, however, you will uptrend, or from a high down to a of the move and so on. rarely need to calculate these low in a downtrend. Many people Many view Fibonacci analysis since most modern trading 15-minute chart (left) shows the daily pivot points on EURUSD. Note struggle to understand where as subjective as there are so software will have calculations to that these change each day and the change from one day to the next is visible on this chart. the lines should start and end, many retracement levels to automatically draw them for you 60-minute chart (middle) plots the weekly pivot points, not all of which are visible due to scaling. yet the answer is actually very look at. They are correct if they (MP = Mid Pivot, R = Resistance, 240-minute chart (right) plots the weekly pivot points, not all of simple. You must be looking at look at these levels in isolation. S = Support): which are visible due to scaling. Cluster – The Mid pivot point plus the 50% retracement on the 60min the potential retracement of the How could you possibly know chart cluster with the S1 pivot and the 38.2% retracement on the current trend. the correct retracement level? MP = (High + Low + Close) / 3 240min chart. For example, in a downtrend, The answer is that you never R1 = (Pivot x 2) - Low Source: www.esignal.com the line must start from a high do know, but you can get a R2 = (Pivot + High) - Low

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S1 = (Pivot x 2) - High Big Numbers watching your screen. price will pull back to that level. Some sensible places for further S2 = (Pivot - High) + Low A big number is a level on a The following are the steps to It may keep on going with its profit targets are: Forex chart that either ends in trade a Precision FX entry: original trend without pulling Unlike Fibonacci retracement ‘00’ double O’s or ‘000’ triple back that far. If so, there is no • The old high or low (‘trend’ levels, pivot points are extremely O’s. These levels present a 1. Locate a strong trending trade. You must wait patiently support or resistance) powerful even on their own and psychological barrier for price currency for the next opportunity. • Fibonacci extensions anyone who has not used pivots to penetrate. Many people also a) Price action must be trending • Big numbers before will soon be amazed at place their stop and limit orders strongly in mid & high Entry, Stop Loss and Profit how often the price interacts at these levels precisely. For timeframe. Targets for Fading Breakouts Conclusion with and changes direction at example, a trader without very b) There must be convergence Entry The most important thing is these levels. For this reason, precise entry and exit levels will between the price and the • Enter 2-3 pips above the consistency. You will be on the at least one pivot point should typically place their order at an indicators. highest point of the cluster if path to consistent results when be included in every cluster. obvious level such as 1.3000 or c) The ADX must be rising and going long. you consistently apply the A cluster of two pivots from 1.3100. This activity around big above 20 to confirm the trend. • Enter 2-3 pips below the lowest same rules. To gain consistency different time periods forms a numbers increases the probability d) The DMI lines must confirm point of the cluster if going you must write a set of trading very strong level. of price being supported or that buyers are controlling the short. rules and apply them with resisted there. Professional market if you are going long, or precision! Locating a Cluster traders are also very aware of the that sellers are in control if you Stop Loss Do not deviate from your Figure 4 shows how pivot points activity around these levels and are going short. Stop losses should always have trading plan unless you have hard will look when plotted on your this increases their significance. some technical protection, no evidence to suggest a tweak is FX chart and provide a good See Figure 3 and note that the 2. Prices have to pull back at matter how minor. That means required. Hard evidence is at example of a cluster of Pivot cluster of Fibonacci levels is also some stage. As a pullback you should work back from the least 10-20 trades of a single points. Both the weekly ‘mid very close to a big number at of the trend starts to occur, cluster to decide on the strongest strategy. The most important pivot’ and the monthly ‘S1 pivot’ 1.9200. This provides additional check, as described above, if place for a stop loss. As a points to remember are: are clustering at the same level. support to the cluster. there is a cluster of support or minimum, the stop should be In addition to this, by drawing resistance that it could pullback placed behind the next Fibonacci 1. Always trade with the well Fibonacci lines on the same Trading Strategy too. If there is no cluster then retracement level, i.e. if you established market trend. charts you can see that the 50 The Precision FX Strategy goes there is no trade. entered on a 50 per cent pullback 2. Have more than one reason for per cent retracement of the short- against traditional breakout the stop should be at least 61.8 every single trade you place. term move up on the 60-minute trading which tends to use market 3. The cluster must include three per cent or greater. 3. Do not deviate from your rules chart matches with the 38.2 per and stop orders to enter trades. or more support and resistance – execute your trading strategy cent level on the 240-minute Instead, you should use limit orders levels, at least one of these Target with precision! chart. to enter on pullbacks, predicting a must be a pivot. Ensure that you have at least 1:1 Combined, we now have a reversal at the point of the cluster, reward to risk on every trade. You By following these rules, you quadruple cluster – two pivots rather than waiting for it to happen. 4. When the above conditions should achieve this by trading in are giving yourself an ‘edge’ over plus two Fibonacci levels all Waiting for the price to reverse are met you have a very high only the strongest trends that are many other Foreign Exchange within less than seven pips of would mean that you miss probability trade setup, and can likely to continue in that direction. traders. each other! This provides a high valuable pips, your risk to reward place a limit order as described Risk no more than 1 per cent of probability trading opportunity will not be as good and overall below. your trading capital. Always take if the price pulls back to the your entry is not precise. You will 5. Note: Just because there is a some profit and bring the stop to cluster. also have to spend a lot of time cluster does not mean that the breakeven at equal reward to risk.

04/2011 www.tradersonline-mag.com electronic-magazine.pdf 19/01/2011 05:51:08 Õ

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K A 1-2-3 Trading Strategy for Your Success on the Currency Market Forex and Market Techniques

In the following a discretionary trading strategy will be presented that is based on the principles of market techniques and can be used successfully in short-term Forex trading. The currencies traded are the base currencies GBP/USD, USD/JPY, EUR/JPY, EUR/USD, and USD/CHF. Active trading hours are from 9am to approximately 12 noon and from 2pm to 5pm. During these hours a high level of liquidity is guaranteed. About 60 minutes each should be allowed for to prepare for the trading day and evaluate it afterwards. TRADERS´ STRATEGIES 46

Determining the Trend as a movement or correction. The central question in market- The only valid prices always are technique science is: Where can the high or low prices, never movement originate? So you opening or closing prices. Also should look at the charts to find pay attention to the setting of situations that make movement the scaling for the price axis. It F1) Long 1-2-3 Formation most likely to occur. To do that, should always be about the same you use the chart with the traded in order to develop a better sense time window (10, 5 or 1-minute of “trendy” markets. An upward chart, for more details see the trend will be intact as long as Money Management paragraph) new higher lows are formed. A and analyse it with a view to downward trend will be valid as finding existing trends. In terms long as lower highs are formed. of market techniques, a trend is If you cannot see any trend, the understood to mean a completed market will be in a sideways 1-2-3 formation. A trend is not situation. considered to be confirmed until its line has moved above or below Setup Point 2, relative to the upward The strongest movements occur If prices rise above Point 2, there will be a confirmed upward trend. and downward trend respectively. when the price can go from a Source: TRADERS´ Graphic In this case a 1-2-3 long (Figure 1-2-3 formation on the traded 1) and a 1-2-3 short formation chart through a Point 2 or a (Figure 2) respectively will be daily line in the 60-minute chart. formed. You follow the same The respective highs and lows F2) Short 1-2-3 Formation approach to deal with longer time of a day are referred to as the units (60-minute, daily and weekly daily line. So you first determine charts). You then divide the the direction of the trend in trend into its component parts of the 60-minute chart, looking movement and correction. The specifically for the direction of the phases between Points 1 and movement since that is where the Ralf Kraemer 2 as well as Points 3 and 2 are major price developments can called movement, whereas the be expected. Daily and weekly Mr Ralf Kraemer studied phases between Points 2 and 3 charts are of a more informal sports science at university are called correction. nature, which means that only and is a licensed stock In doing this, it is important not the highs and lows should be market trader. As a full-time to “dig in” too deep into the chart. paid attention to as resistance trader, he trades his own The zigzag indicator may be used and support lines. Secondly, you account. as a tool here; depending on the determine the trend situation in Contact: [email protected] time unit, it will be set at a fixed the trading chart. Now you look If prices fall below Point 2, there will be a confirmed downward trend. value, preventing too small price for a 1-2-3 in the trading chart in Source: TRADERS´ Graphic changes from being interpreted the direction of the trend of the

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60-minute chart. So, for example, Risk Management position. If, for example, the a 1-2-3 long in the direction of a) Right after the execution of price in the example above is the upward movement in the the order the initial stop (IS) quoted below 1.3566, the BES 60-minute chart. Thirdly, then, will be placed in the market. will apply. So you trail the IS to there is the evaluation of the To do that, you need the 1.3579, hedging the trade with risk-reward ratio (RRR). The indicator ATR (Average True a pip in the profit zone. In doing approximate risk is known to you Range) in the 14 period setting. so, you do not wait for the end Info even before the trade because It indicates the volatility of a candle or a bar, but use the of the initial stop. Using the benchmark and is included in current price. Sweet Spots: Sweet Spots are support or resistance tools of technical analysis, you every standard chart program. c) Amid some fluctuations the zones at round price levels. As a result of increased order now assess the chances of a The IS may be 1.5 ATR plus Euro now continues to fall, volume, there is more trading activity in these areas. Two possible movement. Is there spread. To cite an example, possibly now through a daily examples of Sweet Spots are 116.00 at EUR/YEN, and any resistance on the way to you enter a short trade in EUR/ line in the 60-minute chart, 1,2800 at EUR/USD. the pips that you need, or any USD at 1.3580 with the ATR once more becoming subject so-called sweet spots? This is (14) being 0.012 and a two-pip to selling pressure. If the book Zigzag Indicator: The zigzag indicator is a fi lter that what the round prices of the base spread (0.002). So you place – profit is 1.5 x ATR plus spread, ignores any price changes below a certain percentage. For example, the 5-percent zigzag only marks changes to currency are called, so 1.3500, as an IS – a buy stop order at you will have achieved the an underlying or indicator that exceed fi ve per cent, as for example. More often than not, 1.3600 in the market: profit target (PT). Now watch measured by the difference between the highs and lows. many orders are at these points, the price development very All the smaller price changes are ignored, making the and the price moves amid strong 1) 0.012 x 1.5 + 0.002 = 0.020 closely here. If, as described zigzag an excellent indicator to recognise turning points. fluctuations. For RRR you need 2) 1.3580 + 0.020 = 1.3600 above, the price has previously at least a value of 1.0, better broken through an important still 1.5 or more. If you always That way you will be protected resistance causing more achieve only the value of 1.0, in case of loss and have at movement, you will recognise F3) Small 1-2-3 in Large 1-2-3 profits will have to be made from the same time determined the this from a fast growing a constantly higher hit rate than maximum size of your loss in volatility. In that case shift the 50 per cent. euros via the quantity of Euro PT to 2 x ATR plus spread. units sold (known in Forex as Even if the current ATR now Entry “lot”). The IS is absolutely vital is perhaps 0.017, always use Once you have recognised a and must not be altered under the original ATR at the time promising situation, a buy or any circumstances. of the order execution (in our sell-stop order will be placed b) Now your trade is moving into case 0.012) for the calculation with the broker two pips above the profit zone as planned, and of the PT. So in our example or below Point 2 that is to be the price is hovering around the PT has been reached at a traded. If you cannot find a 1-2-3 1.3565. In that case, the next price of 1.3560. This decision in the direction of the trend of risk management rule which concerning the PT requires the longer time unit, you may In the 5-minute chart GBP/USD you can see a large short 1-2-3 applies is the break-even stop some experience that you will (pink line) and a small short 1-2-3 (blue line). Also clearly visible: the also look for a small 1-2-3 which (BES). The rule says: If the price actually gain just by sitting in increasing volatility when breaking through the major point 2 at a price enables a movement through a is 1 x ATR plus spread in the front of your screen. Depending of 1.4910. large 1-2-3 in the same time unit profit zone, no losses should be on the trading platform used, Source: www.gftuk.com (Figure 3). allowed to occur for the initial various types of order will be

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offered to you for exiting the successful trades already move your position size at 1.36 lots. trade. You can determine the into the profit zone after a short So you should trade accounts PT as early as the execution time, and only very few losing that offer you the opportunity of the order since it is already positions go on to be major to order mini lots; that way you known via the ATR, or you can winners. Close this position by can set the position size much exit the trade with a market market order. more precisely (in this case 1.4). order (Figure 4). b) If the initial portfolio balance In Figure 4 you can see a short Money Management sustains losses of five per cent, trade in the 5-minute GBP/USD Money management can arguably your risk will be lowered to 1.5 chart. After a double top shortly be called the centrepiece of any per cent. So if the balance of after 9 am, the price falls below trading strategy. This is where the your trading account falls below the resistance at 1.5200 down size of the individual position is 9500 Euros, your positions will to the orange line at 1.5179. determined and the risk for the be reduced, lowering your risk. This is Point 2 in short 1-2-3. entire portfolio is managed. In c) In case of an additional loss The price bounces back up this strategy a modified fixed-risk of five per cent your risk will to 1.5215 and then falls below system is used. be lowered to one per cent – Point 2, where the stop order is relative to the initial portfolio executed at 1.5177 (red arrow a) The standard risk for the balance of 10,000 Euros, i.e. downwards). At that point in initial portfolio balance is two with a portfolio balance of below time, the ATR is 0.015, after that per cent. So you are only 9000 Euros. This risk reduction the IS is placed in the market allowed to risk 200 Euros for is also called the anti-Martingale at 1.5202. During the next a position with a portfolio strategy. It helps you to protect F4) Short Trade GBP/USD of 9th January 2009 three candles the price hovers balance of 10,000 Euros. This your portfolio in case of loss as around the break-even point means that you adjust the well as to stay in the market. and then continues to fall with size of the position in such a d) Your risk will not be increased volatility once more increasing. way that in case of loss the until the last stage of loss At a price of 1.5147 the position loss will be no more than 200 has been recouped. So if the is closed via market order (red Euros with the given 20-pip IS balance of your portfolio is arrow upwards). The profit from the example above. For above 9000 Euros again, you target was achieved. this calculation you need a will be trading with a risk of 1.5 d) The fourth way of ending a so-called pip calculator which per cent. By the same token, trade is the time stop (TS). This is included in most Forex if the balance of your portfolio rule says: Close the position trading platforms. Using this exceeds 9500 Euros, your risk after the seventh candle calculator, you determine the will be two per cent again. (relative to the 10-minute chart) value of a pip relative to the e) Each new high in the balance if rules A to C have not applied trading quantity of one lot of your portfolio will cause your previously. Statistical studies (which equals 100,000 Euros). risk thresholds to be revised of this strategy have shown In Figure 4 a short trade is documented. Even at 1 pm a long 1-2-3 For our example, this adds up upwards. So let us say your could have been traded. However, the trade was not executed due that after the seventh candle to a value of 7.36 euros a pip. trading has been successful to the direction of the trend in the 60-minute chart being downwards. no more significant profits Now since your risk must be and the balance of your Source: www.gftuk.com can be expected. The most 20 pips, you can determine portfolio amounts to 11,200

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Euros. Accordingly, your 1.5 per successfully in active Forex chart was switched to the one- US. Again, exercise caution here in longer time windows was not cent risk threshold will now be trading. The hit rate is at about minute time frame here. This when opening positions. tested and not aimed at in practice at 10,976 Euros. 70 per cent, the profit factor at made it possible for trends to The Forex market is an OTC either. In order to enhance trend f) In case of a decrease in the 1.7, and maximum drawdown at be better recognised, sensible (over the counter) market. There determination, an indicator (for balance of your portfolio by 20 eight per cent. Prior to trading, stops to be set, and position are no uniform rules and there is example, a moving average) may per cent, trading will have to the strategy had been extensively sizes to be determined. The no supreme regulating authority. continue to be used but it should be discontinued. In that case tried out in backtesting. 1,500 relatively large price fluctuations This has benefits and drawbacks have no impact on the concrete the structure of the market has trades dating back to the resulting from the news, above that every trader should weigh and setup. If in doubt, always choose changed so much that it no years 2005 and 2006 were all in afternoon trading, are a assess in terms of his own personal the underlyings with higher volatility longer fits your trading strategy. investigated. For the purposes special characteristic of Forex circumstances. It is important on a daily basis, using the ATR if of risk management, work with trading. You should not open any therefore for you to check your you wish. Using pivot points in the Reliability ATR has turned out to be very positions shortly before those broker and custodian to make sure trading chart has also proven to be All of your trades should be flexible in practice. Especially in news bulletins. More often than that they are of high quality. useful. They often form resistance meaningfully documented. The times of increased volatility as not, the price moves into the or support zones that are taken most important indices of your we have witnessed them during other direction only to again end Conclusion into account during trading. strategy must be evaluated and the high points of the financial- the setup favoured by you. Also, The above strategy makes it constantly monitored. market crisis, the strategy made there is very little volatility in possible for you to engage in For two years, this strategy successful trading possible. the markets on public holidays, successful short-term trading has been tried and tested However, at times the trading especially in Great Britain and the on the currency market. Trading

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Reasons for Scalping intended. At best, the vast The most important reason why majority of the other trades end traders decide to use this strategy as a zero-sum game, which in rather than any other, is their turn highlights the importance A Scalping Strategy for the EUR/USD initial perception that it is easier of discipline. The stop must be to do your trading with small kept at any price, and it is often movements than with large ones. better to exit and accept what still How Fast Is Your Money? Whether or not this is actually the is a small loss. While it cannot case may be seen to be different be denied that many mini gains from one trader to another. The may add up to a handsome daily Scalping is often considered to be a strategy for experienced traders, requiring quick decisions and fact is that the more experience profit, the reverse is equally true. good reflexes. But is it really that difficult? And is it learnable? One thing is certain: Nobody gets to be a is gained in scalp trading, the This is what you might see at good scalper overnight since scalping takes a lot of practice. Traders are required to watch market more quite different components the end of a typical trading day: movements on a chart for many hours. They need to learn to find a maximum number of of this strategy come to the fore. Profit: 360 pips, loss: 345 pips, precise entries with very tight stops, using the laws of probability to their advantage. In For example, good scalpers result: 15 pips. the end, it is all about recognising one or several setups and executing a given have very high Sharpe ratios This shows that a single trade without any time lag, causing it to be carried out nearly automatically. (the excess yield of a financial moment’s carelessness or As is the case with piano playing, certainly not everybody will get investment as a function of the psychological weakness on the to be a virtuoso, but all those who make a serious effort are risk to a benchmark such as the part of a trader may ruin the quite capable of achieving decent results. Besides, risk-free interest rate). Beyond work performed during an entire scalping can be a lot of fun as well. that, they often only have to put trading day or even a whole up with small drawdowns. These week. are quite substantial benefits leading to above-average smooth The Opportunity Factor equity curves and rapid account Nevertheless, scalping can be growth. extremely rewarding: Wherever The key here is to keep losses there is a small benefit, it is only as small as possible. This sounds logical to take advantage of this easy but in reality already is a benefit as often as possible. And stretch for most traders. Besides, that is the actual strength of this that method operates with low strategy, which may be used risk-reward ratios that are not both in strong trend markets necessarily offset by a high hit as well as sideways markets rate, as is so frequently claimed. and in sleepy midday markets. Instead, during the trading day Profit expectation (relative size the trader “by chance” succeeds of profits and losses), however, in stumbling upon some major is exceedingly small with movements that he had not Forex trading sometimes only

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anticipating less than one pip. there is a breakout downward, setting offers dozens of intraday must be said that unfortunately, This is certainly one reason why albeit only of a short duration. trading opportunities as well, conditions like in the futures many consider the strategy to be Oftentimes this is followed by which is enough for the beginner. markets do not exist yet in the inferior. an extremely strong upward Once more experience has been Forex market. Sometimes the Why should any trader risk movement. These may be very gained, 10 or 5-second charts spread is the biggest cost factor a position if he can expect an lucrative prospects if a trader has can be worked with. in this strategy, which is why it average profit of less than one the courage to take the trade. Quite certainly, there are many should be given special attention. pip per trade? No day trader, Nevertheless, it must be said more trading opportunities here; let alone a swing trader could that every moment in the market however, it must be realised The Position Sizes possibly be bothered with such is unique and nobody knows that ever smaller time units will Those who work with the a trade. However, the scalper what is going to happen in the cause difficulties (traps, fakes, 30-second chart are well advised knows: All I have to do is to make next second. Nor is that actually spikes etc) to increase well-nigh to initially use a stop of ten sufficient (often 100 or even more) necessary. Traders know that disproportionately. Especially pips with EUR/USD. That may trades and exercise discipline they are only administrators of in the Forex market, you are sound more like day trading than in pursuing my strategy – and their accounts and that there is dealing with extremely savvy scalping, but above all, the stop my profits will add up. That is a rather random distribution of and experienced traders (and should be regarded as protection the reason why good scalpers profit and loss trades. Their task computer programs) that have of your capital and not as an can achieve higher returns than is to exercise strict discipline the most modern tools at their integral part of your strategy. A day traders or swing traders. in order to easily work the disposal. The chart setting does disciplined scalper already exits Profit therefore is a function balance between the two to their not always have to be the same. when sustaining losses of four to of profit probability multiplied advantage. That is all that is There are slow and fast markets. five pips. However, the stop is not by opportunity (the number of needed. It goes without saying that set at this point because it is too possible trades I can make on the 30-second setting is often easily executed. one trading day). Chart Settings sufficient in the case of slower Using the example of a $50,000 The shorter the periodicity markets. In the case of fast account and a stop at ten pips, A Sense of the Market (time period) of the chart, the markets (often after 3.30 pm, at a trader initially should not risk There is no doubt that anybody more often there will be trading the opening of American trading), more than 100 dollars per trade can get some sense of the opportunities. All the chart however, the 10 or even 5-second entered. This represents 0.2 per Peter Devaere market – provided they practise settings below 30 seconds may chart setting is more suitable. cent of his total capital. So he long enough. Scalpers have the be called scalping approaches. trades with 100,000 dollars or a Mr Peter Devaere, who was major advantage of entering This is where the choice of a Spreads mini lot. That sounds conservative born in 1964, is a native of many more trades than classic broker requires care. Not every The EUR/USD spread may vary but you have to remember that Belgium and has been trading day traders, which means that broker offers 30, 10 or 5-second tremendously from one broker to considering the trading frequency stocks, futures, and CFDs their level of experience is higher. charts. If need be, a trader another. It stands to reason that of a scalper, series of losses of intraday for more than eight There are, after all, patterns can obtain a software program brokers offering narrower spreads five to ten trades can occur now years. He has specialised that recur time and again, and offering these features. Initially, (one pip or less) are preferred. A and then. This means that the in scalping strategies in the if a trader recognises these, he the 30-second setting is the one lot has already been happening one percent-loss threshold will Forex market. can use them to his advantage. to recommend to the scalping here in the past few years that be reached relatively soon. When Contact: [email protected] For example, what frequently neophyte. There is plenty of made scalping in the Forex sustaining a day’s loss of two per happens to EUR/USD at action there already requiring a market accessible to the retail cent I absolutely recommend that resistance lines is that seemingly trader’s undivided attention. This investor for the first time. Still, it a trading break be taken.

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Only when your capital day trading. In trend markets One example may suffice to smoothing of the trend phases. and hardly reveal any more is growing (as well as your trend-confirming formations like illustrate this: Basically, a potential These are represented more shadows below (Figure 1). The confidence) should you increase flags, ascending or descending setup is a classic trend-change distinctly, causing trend-reversal previous movement should run your sizes. In addition, it must not triangles, or breakouts from strategy. The type of chart we formations to become more like a staircase, i.e. upwards as be forgotten that scalpers collect consolidation zones work equally will choose is a Heikin Ashi chart visible. However, it must be noted steeply as possible. A trader pips less because of the quality in the seconds chart as in the which is a chart and an indicator that this type of chart does not speculates on the market of their trades than because of hourly chart. To some extent, rolled into one. No further reflect the exact price, which is initiating a countermovement their frequency. If a drawdown it is amazing how charting indicators or moving averages why a trader should always keep from a certain point. He tries to occurs, the position size will be is sometimes adhered to will be used. The benefits of an eye on the price ticker. His determine the exact turning point. strictly reduced until a trader is scrupulously. The old adages this technique are obvious: The full attention is now given to the Towards the end of the trend back to his winning ways. “As above, so below” or “In a uptrends and downtrends are EUR/USD price movement in the the bodies become smaller and microcosm as in the macrocosm” suddenly shown clearly and 30-second chart. He is going to more and more shadows appear Setup are confirmed here most fittingly. unequivocally. Beyond that, you wait until a clear trend is formed. above. This is where a trader Basically, when scalping with One thing must be remembered can easily recognise the strength may open the order mask for a very small time units, the same though: In a microcosm a trader of the trend, consolidation phases Short Trade short trade. Entry is made after charting rules apply as when has very little or no time at all and the indications of changes At the beginning of a rising trend the first red body as per market doing other trading. So as a to consider whether to enter or in the trend. The advantage the size of the green bodies is order. Experienced scalpers try to matter of principle, all the setups exit. He needs to act fast and act of the Heikin Ashi chart over still normal but as the momentum anticipate this entry by entering can be used that occur in classic appropriately. the candlestick is the visual increases they become longer during the consolidation in order

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04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 53 to gain a few pips. Obviously, Scalpers can use this to their day, some scalpers execute this will also increase the risk of advantage. They collect their hundreds of trades here. Some trading a false signal. Exit will be profits much earlier from a short of these traders have very high F1) Short Trade made as soon as the first green trade than on a long trade. Sharpe ratios in the statistical candle emerges – again, as per evaluations of their trades. In market order. No ifs and buts The Trend is Your Freind order to move up to this league, about it! Generally speaking, trading a trader really needs to be “hot”. This is certainly the more in trend markets should only This may work well for a while difficult part of this strategy. It be done in the direction of the but even the best of traders is not about riding a trend but prevailing trend, i.e. in long occasionally need to come down going along with part of the markets only long and vice versa. again a bit and trade with a countermovement (that nearly This is all the more important “leisurely” periodicity. always occurs). How many pips because scalpers trade in ultra- there will be in the end is subject short time units and can therefore Conclusion to chance. Sometimes there are easily be wrong-footed when This setup is only one of many. only one or two pips. But more trading against the trend. In Within a falling trend the euro forms a temporary high. The first red It goes without saying that the candle generated a short signal at 1.4626. The trade was smoothed often than not, there will be more sideways markets trading can be exact entry is part of every when the first green candle emerged at 1.4615. Profit amounted to and it may happen now and then done both long and short, always good scalper’s stock-in-trade. eleven pips. that the entire previous movement remembering that every sideways Nevertheless, the significance Source: www.oanda.com is reversed. Those are the trades market is liable to come to an of the entries within the overall that improve your account. end at one point. A brief look at scheme of the strategy should the longer 5 or 15-minute chart is not be overemphasised. When Long Trade enough to discover this. to enter? This question is on the F2) Long Trade Traders use the same approach This strategy is easy to minds of many neophytes. But when dealing with a long trade understand and implement. It as they gain more experience, (Figure 2). Here they wait for a simply has to be easy because the the question of “How much clear downward trend to form that usually a scalper hardly has should I risk?” comes much also runs as steeply as possible any time to think. He has to act more to the fore. Basically, a (like a torrent). They are going to as soon as the signal is there. trader trades his account and wait for the consolidation (small That strategy can equally be not the market. Consequently, he red bodies with long shadows used when trading with the 10 should always keep an eye on the above and below) to occur, and and 5-second chart. These volatility of his account. During then go long as per market order often only allow a profit of one drawdowns position size must after the first green body. Exit or two pips to be achieved, be reduced radically. Only that will be made here at the first red but occasionally a trader may way can a trader get through bad body, also per market order. It After a sideways movement the euro fell by more than 20 pips in a very succeed in a right movement of patches and ensure his long-term few minutes. The long shadows of the bodies at 1.4590 suggested should be noted that, as a rule, ten to 20 pips without intending survival as a scalper. buying interest, but the long signal, the first green candle, did not materialise until a little later at 1.4585. When the first red candle downward trends occur much to do so. Nevertheless, this ultra- emerged, the trade was closed at 1.4590. Profit amounted to five pips. faster than upward trends. That short chart setting requires a is the case in all markets, but trader to be experienced and Source: www.oanda.com especially so in the Forex market. extremely disciplined. On a given

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Using Daily Data for Triggers and Short-term Data to Manage the Trade Limit Your Losses and Let Your Profits Run

You have heard the old saying “limit your losses and let your profits run”. This trading strategy attempts to do exactly that. The strategy seems to do very well in all markets as long as it is a reasonably tradable symbol, Stocks, Futures, or Forex. This strategy attempts to pick tops and bottoms while the market is in or was just in an overbought or oversold condition.

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The Setup and red bars when the high of the In creating the price action setup, price action is overbought. Any you should consider using an bar that is above 30 and below 70 oscillator based on daily data. is white and therefore hidden on Relative Strength Index (RSI) a white background. A signifi cant is an excellent oscillator to use shortcoming of an oscillator is for this purpose. Do not rule that in fast trending markets up out the use of another oscillator or down the indicator can and like Stochastics or Commodity does occasionally maintain an Channel Index. They also overbought or oversold condition create overbought or oversold for quite a while. This is not the conditions using different most common characteristic mathematical calculations. The of markets but it does happen. basic setup is for the market to Practising good money go into an overbought condition management techniques which (for sell triggers to develop) or are built into this strategy should an oversold condition (for buy prevent you from taking large triggers to develop). If you use the losses. “Limit your losses, and let Relative Strength Index, consider your profi ts run”. using a smaller input number than In the following material you will Wells Wilders original 14 periods see examples of buy triggers. The F1) EUR/USD Daily Stan Ehrlich of time. Remember we are using sell triggers are an inversion of daily data for the setup. A smaller the buy triggers. For 40 years, Mr Stan Ehrlich input number will make the has been a lecture, teacher, oscillator more sensitive to price The Trigger market letter author, inventor, action and it will create more While the symbol is oversold, software developer, broker, frequent overbought and oversold or within a few days after being brokerage firm president, conditions which will improve the oversold, you want to look for and fund manager, providing environment for more triggers i.e. a bullish engulfi ng candlestick, traders information via world- trades. or vertical bars. I started out wide television radio and As you can see, the Relative 40 years ago using vertical bar Internet. Strength Index at the bottom in charts, so I like them more, but Here is an example of an oversold condition and a Bullish engulfing daily price movement using a paint bar which turns the bar green. www.StanEhrlich.com. Figure 1 is a customised version the results are the same whether which shows green bars when the you use western style vertical bar Source: www.tradestation.com low of the price action is oversold charts or Japanese candlestick

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 57 charts. There is some discussion body is always bearish and a As you can see in Figure 1, I as to exactly what the defi nition green body is always bullish, am showing you an example of a of the engulfi ng candlestick or not true. Again, you should use Forex currency pair which is in an vertical bar is, so let us clarify the price extremes of the day oversold condition and has had a that. relative to the previous day and bullish engulfi ng day. Using daily data the high of not just the distance between the the day or the high of the wick openings and the closings. This Two Different is higher than the previous day’s defi nition may vary slightly from Entry Trigger Points high, and the low of the wick what you are used to. You will There are two different trigger or vertical bar is lower than the see green vertical bars (which points which create orders for F2) EUR/USD 15 Minute, Trailing Stop Entry previous day’s low, and the are “paint bars”), which represent entry purposes. You should be closing price is higher (for bullish a daily range that qualifi es for looking to buy long around the engulfi ng) than the previous day’s the combination of the setup i.e. middle of the range of the bullish closing price (for buy triggers). oversold condition and having engulfi ng day during the next If you are using candlesticks, bullish engulfi ng price range. So few days. In an effort to improve there are circumstances when when we have a bullish engulfi ng your entry price, once the market the body could be red or green candlestick or vertical bar and an touches the middle of the range and still qualify. Do not let the oversold condition currently or of the bullish engulfi ng trigger colour of the body trick you. within the last few days we have day you might use a very tight Traders tend to think that a red the trigger to make a trade. trailing new long buy stop for entry purposes. Sometimes the Here is an example of a new long entry using a tight trailing stop in magenta, and an exit using a tight trailing sell stop which is hit as the market price action will drop off result of an extreme overbought condition short-term. Strategy Snapshot signifi cantly below the middle of Source: www.tradestation.com the range of the trigger day and allow you to get into a new long Strategy name: Daily Data for Triggers and Short-term Data to Manage Strategy type: Indicator-based, reversal trading position that is signifi cantly lower Time horizon: Daily data for the base signal, any shorter-term time i.e. closer to your protective sell F3) EUR/USD 15 Minute, Higher High Entry frame to manage the resulting trade stop, which means if you get Setup: An overbought or oversold condition with a bearish stopped out you should have a engulfing or bullish engulfing day smaller loss, which involves using Entry: Market order, if the percentage retracement is reached a protective stop loss order just Buy stop, if breakout occurs below the low of the trigger day. Stop loss: Trailing protective stop loss relatively close to entry price Take profit: Not used That buy stop is labeled “NLEBS” Trailing stop: Based on short-term data for “New Long Entry Buy Stop” in Exit: Trailing stop Figure 2. Risk and Money Management: Trailing stop is a discretionary amount but must be There should be only one entry small, and there is a maximum of two entries or less. around the middle of the bullish Average number of signals: About six signals per symbol, per year engulfi ng day if the market trades Here is an example of a new long entry on a higher high than high of Average hit rate/profit to loss/ the engulfing trigger day, and the exit using a tight trailing sell stop at those levels. And you should which is hit on a short-term dip. return per month: About 50 per cent be putting a new long buy stop Source: www.tradestation.com market order just above the high

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 4658 of the bullish engulfi ng trigger keep in mind what your risks are Protective Stop Techniques data has provided very good What you may want to do is to day to prevent the market from given each position. If one of Once you have entered a new results. As you have seen so tighten your trailing stop as the running away from you (shown in the trades, usually the breakout long position on either of the far the entry setup is based on oscillator gets more and more Figure 3). new long buy stop position entry points, immediately place daily data and an overbought or overbought. Sometimes the market will represents a larger risk than you a protective sell stop loss order oversold condition. The trigger This technique will frequently just run straight up and the would like to take do not make just below your entry price is based on a bullish or bearish get you out of your long position new long buy stop market will the trade. Figure 2 shows a buy as previous mentioned. This engulfi ng daily price range. Now very close to short-term rally get hit, and the middle of the around the middle of the range protective trailing sell stop the protective stop is going to highs. If you are using extremely range of the engulfi ng day will of the previous bullish engulfi ng technique has room for your be based upon much shorter- short-term data to move your not be reached. Sometimes the trigger day using a tight new long personal risk management term data. Depending upon your trailing stop your trades will last a market will retrace back into Entry Buy Stop (NLEBS). This tolerances, i.e. not to close own personal trading style you very short-term timeframe. If you approximately the middle of Order is hit and immediately we and not too far away. Because may choose to use anything are using, say, hourly data your the range of the engulfi ng day create a relatively tight protective this trading strategy is still in from 1 minute data on upwards trades may last several days. and then reverse to breakout trailing sell stop just under our development you should think for the use of your “trailing” stop bullishly. So there is a possibility entry price. The protective sell about tightening your protective calculations. The concept here is Conclusions – that you will end up with two stop follows the market, never stop if the risk factor is too large to start tightening your protective Putting It All Together positions. This is a way of moving down, but during a rally for your personal tolerances, or stop loss order relatively quickly. So what you have is a trading “trapping” the market so it begins to tighten even more as not making that trade. Using a Having used this technique strategy which generates a cannot get away. Continue to short-term RSI rises. trailing stop based on short-term for many years the underlying trading trigger based on daily philosophy is to “Limit your data or even weekly data. But losses, while letting your profi ts once the position is entered the run.” Some traders may not want exit technique is based upon to place a profi t taking order. much shorter-term data. Consider moving your protective I would like to throw out TRADERS´ is a premier publisher of trading magazines for the  nancial markets. Our vision is to o er an international stop periodically to “lock” in less another concept. Since this platform for industry professionals and serious traders alike. risk, and/or more profi t over more setup, trigger, and resulting favourable price movement. entry and exit orders, attempt to pick market turning points, Freelance Authors Trade Exit Techniques and good entries, you might If the market moves in your consider trading an option on the Your Point Of Entry To favour relatively slowly you will underlying symbol instead of the want to move your stop relatively symbol itself. This should provide Finance and Media Industry Ideally you should be a practical trader and have considerable knowledge of technical slowly. But if the market rallies more bang for your buck. analysis and all the related subjects like risk and money management, trading very sharply in your favour your The automation of this trading software, trading systems and trading psychology. You will work from home, on your short-term oscillator is going to strategy and the order placement Please send your own time-schedule and submit articles at specifi ed deadlines. get overbought quickly. Over technique with option trading application via e-mail to: time you will notice that this very capabilities is close to reality. short-term overbought condition [email protected] frequently leads to a downside www.traders-mag.com bearish correction or at least some sideways price action.

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 59

Why Parabolic SAR? is not a standalone system. It will Why do I like the Parabolic first alert you of a potential trade SAR? Because when applied and suggest ways to monitor in the manner I will explain, and manage the trade once you using PSAR can help guide you have decided to enter. If you in implementing good trading have other indicators that you discipline by answering most of have confidence in using, they the questions you have about should not be ignored. But do placing a trade. Questions like: not clutter the chart with so many indicators that the confusion • Is it time to place a trade? factor overwhelms what price • Should I go Long or Short? movement is telling you. • What should my Position Size be? The Trading Time Frame • Where should I place my Although the usual trading time protective Stop? horizon I use is 3 to 5 minutes Increase Your Probability of Making Higher Returns when Trading Forex • When should I move my for intra-day trading, the PSAR protective Stop? Trading Strategy also can be • What is the correct entry price? used for short-term swing trades. Trading GBP/USD Using • What type of Entry Order Remember, once you have should I use? decided on the time frame you • When should I take Profit? will use to place and monitor and Parabolic SAR (PSAR) manage the trade, you should By now you might be always check one lower time wondering how PSAR can answer frame for confirmation and one The “Parabolic SAR (stop & reverse) Indicator”, also referred to as the “PSAR”, is one of the most useful tools a Forex all these questions and not be higher time frame for support. Trader should know but few take the time to understand how to implement it effectively. At some point almost every the elusive Traders Grail you have So when using the 3 or 5 minute trader has looked at PSAR and become confused with its application. So it has been brushed aside in that never ending been looking for. The answer to chart to make a trading decision search for the “Traders Grail”: that one indicator that will give you consistently profitable trades. If you have been trading that question is the realisation first check the 1 minute chart for any length of time you have probably come to realise that the Traders Grail does not exist! If you are new to trading, that no one indicator or to make sure price action is let me break it to you more directly. Stop looking for something that does not exist and learn to trade using “Decision combination of indicators will ever already moving in the anticipated Support Tools” like the PSAR. PSAR is not the only tool you can use and is arguably not the best. Understand this, in my give you 100 per cent accuracy. direction. This is confirmation. opinion, there is no best. Finding the right tools, techniques and trading strategies is a very personal task. Just as there The best we can anticipate is Next check one time frame higher is no “one size fits all” pair of shoes, trousers or shirt that is comfortable and fits properly on everyone, there is no single that by sticking to defined trading on the 15 minute chart to make trading tool, technique or strategy that will always work. The best we can do is become “Competent” and “Confident” in rules we will have a better chance sure price action is not in conflict the way we trade and let the results speak for themselves. at high probability trades. As with the anticipated direction. the “PSAR Trading Strategy” is Additionally make sure that the explained please keep in mind it hourly, 4 hour and daily support

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 60

and resistance levels will support initiate when the ticks are rising. your decision. Now you are ready You do not want to be chasing to trade! the price down. B. Sell if the period / candle / bar The Setup that caused the flip “up” closes A trade setup first requires a above the last lower PSAR. “Parabolic Flip” based on a start/ Enter Short using a limit order incremental 0.01 and maximum and determine the limit price 0.089 PSAR parameters setting. by applying your per trade risk Why these settings work, I do not tolerance in pips down from the F1) GBP/USD know nor do I really care. When first new upper PSAR. you find something that works, stay with it. Not to say you stop In either case, when shorting, looking for improvement but you the initial protective stop will do not want to fall into the trap of always be the first upper PSAR becoming a statistical analyst and plus the current spread. not a trader. I have been there and done that and believe me it is not C. Buy if the period / candle / the way a trader makes money. bar that caused the flip “down” closes above the last upper Entry and Stops PSAR. 5 minute chart with Parabolic SAR Indicator with details and example of news event impact on price action. A Parabolic Flip occurs when the Enter Long using a stop limit PSAR indicator that was showing order with the last upper PSAR Source: www.tradestation.com below or above price action flips as the stop and between one to above or below price action. to two times the spread above This is your alert that a potential the stop as the limit price. Bert Antonik trade may become available. Alternatively, you may use F2) Parabolic SAR Short Trade Analysis Provided you get consensus from a market order to enter but Mr Bert Antonik is a retired the lower and higher time frames only initiate when the ticks are US Navy Commander and as noted above, then: falling. You do not want to be senior instructor for Online chasing the price up. Trading Academy who brings A. Sell if the period / candle / bar D. Buy if the period / candle / over three decades of trading that caused the flip “up” closes bar that caused the flip “down” knowledge and experience to below the last lower PSAR. closes below the last upper his classroom presentations. Enter Short using a stop limit PSAR. For more information, go to: order with the last lower PSAR Enter Long using a limit order http://www.tradingacademy. as the stop and between one and determine the limit price com/about-us/instructors/ to two times the spread below by applying your per trade risk 5 minute chart with details explaining stops, entry and targets selection for a short trade. Bert-Antonik.aspx the stop as the limit price. tolerance in pips up from the Alternatively, you may use a first new lower PSAR. Source: www.tradestation.com market order to enter but only In this case, when going long,

04/2011 www.tradersonline-mag.com TRADERS´ STRATEGIES 61 your initial protective stop will pass beyond the last PSAR prior This strategy can be used always be the first lower PSAR to the flip the new PSAR’s are trading pairs other than GBP/USD minus the current spread. used to continuously adjust the and has good results in all major stop and lock in profit! pairs and cross pairs. Target Emergency Exit Rule! If at The better time to trade this F3) Parabolic SAR Long Trade Analysis Now that we know how to use the any time while in a trade a flip strategy, although not exclusively, PSAR to determine first the initial happens, close the position using is about one hour before the protective stop and second the a Market Order. This usually London session begins to about order entry price we can use it occurs during news events when the close of the US session. to anticipate a target price. (Note you should probably not be Within this wide time span there that we specifically focused on trading anyway. will generally be one to two hour protecting our accounts first.) periods when good flips are more For both the Short and Long Additional Tips probable. trade, first calculate the pip Here are some additional tips to Use alerts whenever possible difference of the PSAR at the help keep you in a good trade to tell you when a flip happens flip. Then take 80 per cent of this and prevent you from entering and anticipate flips at significant distance and subtract it from the low probability trades because in price support and resistance last lower PSAR at the flip in the my opinion, it is better to miss a 5 minute chart with details explaining stops, entry and targets selection levels. Do not abandon good for a long trade. case of a short trade, or, add it to good trade than to get into a bad trading practices in favour of any the last higher PSAR at the flip in one. single indicator trading strategy. Source: www.tradestation.com the case of a long trade. You may You could also use an EMA(13) want to take less than 80 per cent (Exponential Moving Average) Conclusion of the calculated pip difference, and SMA(21) (Simple Moving When applied correctly and used down to about 50 per cent, if you Average) to help further confirm in a consistent manner based Strategy Snapshot are an impatient trader / scalper that you’re trading with the trend. on objective rules, the PSAR as long as the risk-reward ratio is If these MA’s (Moving Average) trading strategy can help traders: Strategy name: Trading the PSAR acceptable to you. are pointing down and the PSAR time the trade, define risk, Time horizon: Intra-day 3 to 5 minute or short-term swing is above the price action holding identify entry levels and prevent trades Managing the Trade Short is further confirmed. The excessive draw downs. Using Strategy type: Trend following, indicator-based Next we want to monitor and Long is confirmed when the MA’s this strategy can help you enter, Setup: Requires Parabolic flip based on incremental manage the trade. Move the point up and the PSAR is below monitor and manage a trade so 0.01 and maximum 0.089 PSAR parameters protective stop to the entry the price action. that your probability of success Entry: Adjusted for individual risk tolerance price, plus or minus the spread If pip difference of the PSAR is elevated while protecting what Stop loss: Dynamic based on PSAR and profit target Take profit: Ten to 20+ PIPS monitor and manage or fixed depending on whether it is a long at the flip is less than ten to 15 you have becomes an ingrained target or short trade, when either there pips it is probably not going to habit. This can then significantly Trailing stop: Monitor & manage, apply automatic beyond is a period CLOSE at or beyond be a good trade. This usually improve the slope of your target one half the pip difference used happens during times when price accounts equity curve! Exit: Fixed on stop or discretionary or emergency for the target price, or, a new is consolidating and whip saw Risk and money management: No more than 2% of account PSAR passes beyond the last movement is most prevalent. Drawdown: Limited to risk tolerance PSAR prior to the flip, whichever MA’s, if used, will also be Average number of signals: One to two per specified time period per day comes first. Once new PSAR’s relatively flat.

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THE WORLD’S MOST TRUSTED NAME IN PROFESSIONAL TRADER EDUCATION™ SINCE 1997 Use Your Own Rules to Be a Successful Forex Trader A Declaration of Independence

There are many good reasons for being successful on the Forex markets. The ever better, faster and safer Internet has opened up the Forex market to new participants. In addition, the large number of FX online brokers has greatly reduced both the minimum deposits required and the spreads. TRADERS´ BASICS 64

Wide Range Euros on No. 17. Number 17 goes have a natural distrust of analysts to your inner voice and develop of Information Available on to win and I go home with and strategy salesmen who structured ideas and trading Today, the independent trader 360,000 Euros. Obviously that invariably only point out the strategies suitable for the trading has a large arsenal at his is a fantastic profit but certainly winners. After all, in this game frequency intended. What is disposal to help him make his does not yet mean that I am a there are not just winners, as equally important is a strict risk trading decisions: round-the- brilliant player or a professor of many traders have found out management. clock financial news, trading game theory, both of whom are at their peril. Although I am not Neither can I offer you a magic magazines, independent and capable of giving really good really a cynic by nature, I have bullet leading you to great wealth. institutional research as well advice. grown accustomed to ignoring But what I can (and would like as trading portals offering both The latest financial to) do is show black-box systems as well as crisis that had a firm you some simple sophisticated technical-analysis grip on Wall Street rules that I have programs. However, such a two years ago is a You will be the one developed myself plethora of information may good example of how and by means of be too much and in turn lead far analysts, traders, to lose your money, which I achieve to trading paralysis or overly risk managers, and sustainably good irrational trading behaviour. For bankers can be wrong. not the analysts. results in my this reason every trader must I thought it was rather trading. These rules be in a position to separate the funny the way analysts may be applied wheat from the chaff and use who had failed to anticipate the any commentator who claims that to the FX markets equally well rules and patterns of behaviour in crisis then defended themselves the price of whatever product he and are suitable both for novice Paul Day order to achieve sustained good by claiming that it had been is involved in would rise. In fact, I traders and experienced ones. profits. inevitable. And how they tried will make short shrift of any trader Mr Paul Day is executive at In his two successful books to calm everybody by assuring who is bullish on gold and works Important Basic Rules MARKET SECURITIES ( a “Fooled by Randomness” and them that Messrs Paulson and for www.buygoldwithoutend. 1) Risk-reward ratio: Kyte Group Company). Prior “The Black Swan”, Nassim Bernanke were the men best uk or of any analyst of www. Many traders enter positions with to that, he was deputy head Nicolas Taleb explains how on the suited to getting the economy out wemakemoneyifyoubuyshares. a scary risk-reward ratio, causing of the research department at one hand, one’s own perception of its current predicament. As late com who touts bank stocks as them to frequently risk more than MIG Investments, a manager may distort happiness, and that, as the summer of 2007, those two a hot-buy pick. Maybe those they can actually win. In fact, at HSBC, and subsequently on the other hand, staunchly had claimed that the crisis was people have the right instinct but many traders trade emotionally a proprietary trader in the held convictions may be fallible. under control and would not spill how do I know whether they are without thinking of a stop loss Strategic Trading Department. And, he argues, this is not just over to the rest of the world of ? at all. Und that is exactly the Mr Day specialises in the case in trading but in every finance or other areas. It is the same story with beginning of the end. technical analysis and is a sphere of life. My basic idea is that as every analyst: If you follow their I can only urge you to use member of the Society of a trader you are constantly recommendations in your trading a risk-reward ratio of at least Technical Analysts. Only Trust Yourself bombarded with numerous tips and get it wrong, you will be the 3:1. So if your profit target for a Suppose I walk into a casino and and suggestions based on sterile one to lose your money, not the trade is not at least three times while playing roulette, bet 10,000 charts and strategies. I personally analysts. It is important to listen as much away from your entry

04/2011 www.tradersonline-mag.com TRADERS´ BASICS 65 point as your stop loss, then cent of my trading capital for any there is always an initial price keep an eye on 15-minute and In a downward movement, leave the trade well alone. Just of my trades. Should your trading derivation. However, one of daily charts as well in order to however, I use the previous do not do the trade! If you have capital increase, your position these should not be used see whether these may show a highs to limit my losses. When a risk-reward ratio of 3:1, then a size will also change accordingly. to confirm the other. If such different picture. the markets show a sustained hit rate of only 2.5 will be enough However, if your trading capital indicators are used for positive trend, it is amazing how often for long-term retention of your shrinks, you should also reduce or negative divergences (that 3) Increase the this simple strategy profits from capital. The following is very your position size per trade. is the only reason why I use extent of your analysis: a movement. important: Never move your stop The three quantities risk- them), always choose only a The markets are clearly linked to b) In markets without trends your further away from your entry level reward ratio, leverage and single oscillator and adhere to one another. When you trade the risk-reward ratio will improve if the trend is moving against you! asset allocation are the basis it. GBP/USD currency pair, it is also if you enter long positions The market will not disappear if that I have chosen for my b) In a sample trade, let us always important to keep track only near a bottom and short you get it wrong, but you will! trading strategy and I am firmly assume that the yen will fall. of the other currency pairs. A positions only near a high. Bet five per cent of sharp upward movement in EUR/ That sounds as though I want 2) Leverage: your trading capital USD probably also has a bullish to teach you new tricks, but Many online FX on JPY short. Do influence on GBP/USD, while during consolidations the platforms offer a Trading currency not sell USD/JPY, when a carry trade is cancelled, markets usually look promising leverage of 200:1, EUR/JPY, GBP/JPY, the higher-profit currency is at the top and discouraging which means that markets can be exciting AUD/JPY, and NZD/ negatively influenced and at the bottom. Your friendly you can move JPY. That would pressure may be brought to bear analyst will probably tell you 200,000 Euros with a and profitable. correspond to 25 on the Pound Sterling. to do the exact opposite of 1,000-Euro account per cent of your And do not just stop at the what would be the best trade and trade with that trading capital risked currencies. Interest rate spreads, in terms of your risk. So try to amount. Running such a high convinced they will help each – apparently the same trade. stock markets, individual divide a consolidation zone risk is completely senseless and trade to enjoy long-term success So your best bet would be to commodity prices, the CRB into five horizontal segments irrational. in the markets. Although I always choose one currency pair and and Baltic Freight Index etc while watching out for short- The GBP/JPY currency pair keep a close eye on the long- stick with it. influence the performance of the term middle reversals at the regularly moves between 1.5 and term overall direction of the currencies. Beyond that, large extremes, and leave your risk in 2 per cent a day. Relative to your market, my trading mechanism is 2) Extend the movements in other markets are the central neutral zone. capital, a leverage of 200:1 would predominantly based on technical depth of your analysis: often a sign of shifts in market mean that you would get a margin analysis. In the following, I will If you trade on the basis of participants’ taste for risk, or Conclusion call even after a movement of now introduce four important rules technical analysis, you should – of a large margin call which in Trading currency markets can be half a per cent against you. That to you that may encourage some besides your chosen time period turn may be a warning sign of exciting and profitable. Constant is why I recommend a maximum of you to try out something new. for your charts – always keep an potential reversals to occur in the and effective rules and methods leverage of 20:1. eye on at least one time frame trending markets. may well help you in your life as a Rules for Technical Analysis further above and one time frame trader and in my opinion are the 3) Asset allocation: 1) Avoid the formation of lumps: further below. If you trade mainly 4) Trending markets vs. fundamental steps to be taken in Do not put all your eggs in one This item refers both to technical on daily charts, always watch markets without a trend becoming a successful trader. basket. Identify a percentage of analysis and to position trading. hourly – or 240-minute – as well a) In trending markets I use short- your capital with whose loss you a) In technical analysis, for as weekly charts, too. If you trade term (three to five periods) still feel comfortable. I myself example oscillators like on a shorter time frame, say on moving averages of previous would not risk more than five per stochastic, RSI’s, MACD etc, hourly charts, you should always lows in order to hedge a rally.

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With this DVD, you also get personal support from Malcolm and other Valid from to Issue # (Switch) traders via access to the exclusive members' area of the UK: £2 per book unless otherwise Subtotal www.spreadbettingcentral.co.uk forums. indicated above Code 280613, £8.49 (RRP: £9.99) Save 15% Europe & Eire: £4.00 for the first Signature Code 460349, £220.50 (RRP: £245.00) Save 10% Postcode book, £2.00 for each extra book Prices in this advertisement are correct at the time of going to press, If, by the time you order, they have changed, we will contact you to ask if you wish to ROW: £6.00 for the first book, TOTAL Daytime tel. Date proceed at the higher price. Web site prices are always most up-to-date. You can always ring us to check latest prices. £3.00 for each extra book From Intelligence Assessment to Technical Analysis Spearman Indicator – Part 1

Discovering and effectively following a trend is the paramount concept of market trading. A long and prosperous career as a trader depends on the ability to be on the right side of a trend. However, this is easier said than done; the envelope is pushed further with the continual emergence of hundreds and thousands of indicators born from the need to assess the trend, understand its strength, and successfully time the trades. Trends develop between peaks and valleys for the timeframe chosen by the trader on investor. Oscillators are good tools to indicate points of exhaustion, with a caveat: these indicators may stay at extreme levels while prices can go further up or down. The use of the Spearman Indicator might mitigate some of these risks, while also helping traders stay on the right side of a trend. TRADERS´ BASICS 68

Background sound like an indicator only for The field of statistics offers those who are very analytically a great source of information focused, but traders at any related to data analysis. The level can apply it once it is core of the Spearman indicator, understood within the context of T1) Perfect Upward Trend in DAX the subject of this article, has some practical applications. its roots in the beginning of Date Close Data original Sequence of Difference R32 the 20th century. The British Spearman’s Rank sequence sorted closings R1-R2 psychologist and mathematician Correlation Coefficient R1 R2 R3 R4 Charles E. Spearman (1863-1945) Example 1 – 31.01.2011 7077,48 1 1 0 0 studied theories of intelligence Perfect Upward Trend 01.02.2011 7184,27 2 3 -1 1 and mental test theory. During Let us consider a set of data 02.02.2011 7183,67 3 2 1 1 his research, he developed a elements in this sequence S = 03.02.2011 7193,68 4 4 0 0 Dan Valcu statistical tool to measure the {11, 22, 33, 44, 55, 66, 77, 88, 04.02.2011 7216,21 5 5 0 0 degree of association between 99, 110}. The physical position 07.02.2011 7283,62 6 6 0 0 08.02.2011 7323,24 7 8 -1 1 Dan Valcu is a private trader, two variables (sets of data): the of each element inside the list 09.02.2011 7320,90 8 7 1 1 Certified Financial Technician Spearman Rank Correlation becomes the first set of ranks 10.02.2011 7340,28 9 9 0 0 (CFTe) and Board Member of Coefficient. R1 = {1, 2, 3, 4, 5, 6, 7, 8, 9, 10). 11.02.2011 7371,20 10 10 0 0 the International Federation of This tool computes the degree Now, each element is assigned a Technical Analysis (IFTA). of correlation between the ranks rank inside the list S: the lowest 4 of the elements in two data (11) is ranked as number 1, the DAX had a high positive Spearman rank correlation coefficient (strong uptrend) during 31/1/2011 = 0,976 groups of equal size. It may next lowest (22) gets a 2, until we and 2/11/2011. ρ

04/2011 www.tradersonline-mag.com TRADERS´ BASICS 69 get to the end of the set where of a consolidation period when and consolidation. Data elements the highest (110) is ranked 10. prices are confusing. used are DAX index closing The new list R2 = {1, 2, 3, 4, 5, 6, The next step is to process prices for certain intervals. 7, 8, 9, 10) has ten elements and R1 and R2 for each scenario. T2) Perfect Downward Trend in DAX each one is ranked between 1 We subtract list R2 from R1 with Conclusion and 10 based on its value in S1 results in R3. Each element in In this first part of the series Date Close Data original Sequence of Difference R32 data set. We should observe that R3 is then raised to the power dedicated to the Spearman sequence sorted closings R1-R2 all elements in S1 are already of 2. The new list is R4. The indicator, we built the foundation R1 R2 R3 R4 sorted in ascending order (a sum of all elements in R4 is and discussed about the 01.10.2008 5806,33 1 10 -9 81 perfect uptrend if we approach used in the following formula Spearman rank correlation 02.10.2008 5660,63 2 8 -6 36 S1 as a set containing closing to compute Spearman’s rank coefficient (ρ). This coefficient, 03.10.2008 5797,03 3 9 -6 36 prices). correlation coefficient ρ (rho): defined by formula, measures the 06.10.2008 5387,01 4 7 -3 9 degree of correlation between the 07.10.2008 5326,63 5 6 -1 1 Example 2 – ranks of two groups of equal size. 08.10.2008 5013,62 6 3 3 9 Perfect Downward Trend A coefficient equal to one 09.10.2008 4887,00 7 2 5 25 Same data elements are used describes a very strong positive 10.10.2008 4544,31 8 1 7 49 as for Example 1, but this time correlation of ranks (a series of 13.10.2008 5062,45 9 4 5 25 in the reverse order S = {110, 99, Where: sequentially higher closing prices 14.10.2008 5199,19 10 5 5 25 88, 77, 66, 55, 44, 33, 22, 11}. n = number of elements in each in the markets). The opposite 296 R1 remains the same because data set (both groups must situation, = -1 is associated DAX had a strong negative Spearman rank correlation coefficient (strong downtrend) during ρ October 2008. ρ = -0,794 of the physical sequence of the have equal sizes) with a strong negative correlation elements R1 = {1, 2, 3, 4, 5, 6, di = difference between ranks of ranks (a series of sequentially 7, 8, 9, 10). Following the same xi - yi of corresponding data lower closing prices). Small ranking procedure as previously elements values Xi and Yi positive or negative values above T3) Consolidation Period in DAX explained, the elements in the list and below zero suggest a lack S are given the following ranks: For our examples, n = 10 and of correlation between the ranks Date Close Data original Sequence of Difference R32 2 sequence sorted closings R1-R2 R2 = {10, 9, 8, 7, 6, 5, 4, 3, 2, 1}. Σd i is the sum of all elements of the two data sets (a trendless This could translate as a perfect in R4. A sequence where each market). The rank correlation R1 R2 R3 R4 downtrend during a period of ten element is greater than the coefficient described in this 14.11.2008 4710,24 1 10 -9 81 bars. previous one shows a strong article is used to build a new 17.11.2008 4557,27 2 5 -3 9 uptrend with ρ = 1. In a strong technical analysis indicator: The 18.11.2008 4579,47 3 8 -5 25 Example 3 – descending sequence, with Spearman Indicator, an oscillator 19.11.2008 4354,09 4 3 1 1 Consolidation Period each element less than the that helps identify tops and 20.11.2008 4220,20 5 2 3 9 Finally, data elements are previous one, ρ = -1. A confusing bottoms in the markets. 21.11.2008 4127,41 6 1 5 25 mixed as S = {55, 99, 33, 11, sequence has ρ values around In part 2, we will show how the 24.11.2008 4554,33 7 4 3 9 88, 44, 110, 88, 22, 66}. R1 zero. Spearman indicator is used in 25.11.2008 4560,42 8 6 2 4 stays unchanged R1 = {1, 2, 3, Table 1, Table 2 and Table 3 practice. 26.11.2008 4560,50 9 7 2 4 4, 5, 6, 7, 8, 9, 10) and the rank summarises the process to 27.11.2008 4665,27 10 9 1 1 assignment process leads to R2 obtain Spearman’s coefficient 168 = {5, 9, 3, 1, 8, 4, 10, 8, 2, 6}. The for each scenario described DAX was confusing during 14/11/2008 and 27/11/2008. As a result, Spearman rank correlation = -0,018 analogy we can make here is one above: ascending, descending, coefficient was negative although with only a negligiable value, . ρ

04/2011 www.tradersonline-mag.com 70

Travis McKenzie Lifestyle Trading

For many years Travis combined trading with his career as a lawyer until he finally tired of the corporate world in 2005. At this time Travis established his previously part time pursuit of trading as his full time endeavour. The difference being, Travis spent as little time trading as a full time trader as he did as a part-timer – he now had free time on his hands to pursue other ventures, namely lifestyle. Travis is a key member of the Trade With Precision trading team and Head of Online Trading. Experienced in both intra-day and Swing Trading, he largely focuses on forex & stock markets. Travis is also a headline speaker for many corporations around the world.

TRADERS´: When did you fi rst either business, property or the TRADERS´: Do you remember get in touch with the stock stock market and there were your fi rst trade? market and trading? no lawyers on the list who had Travis McKenzie: I do not Travis McKenzie: I was about 18 made their millions solely from remember my first trade but years old and had just started practising law. I was always told I started my trading career my law degree at university. I to study hard, get a good job by trading Australian stock was in the library one day and and you will become wealthy options. This was pre 2000 started reading a magazine which but the evidence in front of me so CFDs and Forex were not listed the richest 500 people contradicted that. It was that available to retail traders. in Australia. I was shocked to magazine that started my passion Options were the most popular find that nearly all of them had for stock markets, property and way to trade stocks on margin attained their wealth through business. back then.

04/201105/2010 www.tradersonline-mag.com TRADERS´ PEOPLE 71

TRADERS´: What do you think one or two perfect trades each The third “aha” moment was the most important lesson week. occurred when I realised that on the way to becoming a This then lead me to have my keeping a spreadsheet of my past professional? second ‘aha’ moment which trades was useless in assisting F1) AUD/USD 60 Minute – Entry Travis McKenzie: During my was when I realised that I had me to become a better trader. It trading career there have been been mislead by the so called was cumbersome when trying to three very clear ‘aha’ moments “experts” in the books and review my trades at the end of the which really changed the way I seminars I had been reading week, month or year as it meant traded which were instrumental and attending into believing that I had to trawl through my charts in transforming me into a there was only one style and looking for the exact location professional trader. market that I should be trading where I got into a trade and then I The first ‘aha’ moment if I wanted to make consistent could see the result which always occurred when I asked myself profits. Upon realising that I affected how I would now assess what was a realistic return I only needed one or two good the trade during the review. As wanted to achieve on my trading profitable trades each week this it was a pain, I usually ended up account each year. I thought made me question why I was not doing any sort of meaningful that if I could make anywhere sitting in front of my screens A near perfect example of how the PLT strategy can get you position review of my past trades. at the very start of a new trend with a low risk, high probability entry. between 50 per cent to 100 day trading for ten hours a day. Someone then suggested that I per cent per year then I would At this point I assessed what take live screenshots of my charts Source: www.tradestation.com be extremely happy with those lifestyle I wanted trading to give at the exact time I placed an entry returns especially if I could do me and for how long each day order. The two biggest benefits of that year on year for the rest of I wanted to trade and at what this was that it meant when I went my trading career. I then broke times. I then let those factors to review my trades I no longer F2) AUD/USD 60 Minute – Exit that down into bite size chucks decide for me what markets I had to trawl through my charts and I realised that if I risked should be trading. I stopped trying to find the exact location only one per cent of my account day trading and instead started where I got into the trade and it on any one trade and aimed to to swing trade stocks off daily also allowed me to look at exactly make at least one per cent profit charts, swing trade commodities the same set up I was looking per trade (i.e. a reward to risk off 60 minute charts and above at when I took the trade. This of at least 1:1 per trade) then I and day trade and swing trade allowed me during my reviews to would only need one profitable forex off 15 minute charts and see if I flawlessly executed my trade per week in order to make above. This change allowed trade plan regardless of what the approximately 60 per cent per me to dramatically reduce the trade’s outcome was. annum (compounded weekly). number of hours I was spending One of the keys to improving This realisation instantly took the in front of the screen each day your trading is that you must pressure off. Instead of trying and allowed me to scan across flawlessly execute your trading to day trade and place lots of This chart shows the benefit of locating trends as they begin and riding a large number of markets and plan. Taking screenshots will them for as long as possible. Half of the position was closed out at a trades each day I realised that timeframes in order to find the allow you to do that. Stop 1:1 reward to risk and the second half‘s stop was trailed to the high of I just needed to become more very best trading opportunities. focusing on whether the trade the new swing highs. selective about which trades I Quality of the trade, not quantity was a winner or loser and focus Source: www.tradestation.com took and focus on finding that became my new focus. on flawless execution instead.

04/2011 www.tradersonline-mag.com TRADERS´ PEOPLE 72

TRADERS´: Have you ever had will trade them all the same using Travis McKenzie: I am not trying exceptionally large losses – or the same set ups. to pick tops or bottoms. 95 per profi ts – at single trades? As I am scanning so many cent of my trades are taken in Travis McKenzie: I have never had markets I need to be very strict the direction of the trend, so I am an exceptionally large loss on on the criteria I am applying to my happy to find a trend and take a any one trade because from my set ups, so I have checklists of all small chuck out of it. This is why very first trade I have always used the factors I am looking for before I focus so much on scanning a F3) EUR/AUD Weekly – Entry money management and stop I will take a set up. I break these large number of markets and losses. I occasionally may have a factors into essential factors and timeframes as this gives me stock trade gap over my stop but bonus factors. Unless all the the best opportunities to trade this is extremely rare because I essential factors are met I will not those markets that are trending am very careful not to trade stocks even consider taking the trade. beautifully right now. which have a history of gapping After completing a scan across all In my opinion one of the and I never hold a position through the markets I watch I might come biggest mistakes traders make company announcements. up with five set ups that meet all is just focusing on one market my essential factors. Out of these and continuing to trade that TRADERS´: Please tell us about five I will only want to enter the market when its conditions your views and concepts of best one or two set ups. So in are no longer favourable. technical and/or fundamental order to establish which two are Weekly chart entries do not occur all that regularly but when they do Whilst their market of choice is they are a perfect opportunity for a trader to enter a longer term swing analysis. the best I will apply my bonus trending they will often see good position which could last weeks to months. The perfect set and forget Travis McKenzie: I would have to factors. I have a scoring system profits, only to give all those opportunity. say that the biggest difference where each essential factor is profits and more back when that Source: www.tradestation.com between my style of trading and worth one point and each bonus market enters into a period of the mainstream style is that I do factor is worth 0.25 points. The consolidation or erratic volatility. not just focus on one market. one or two set ups with the The question I always pose Most traders I talk to will say highest scores are the set ups I to traders in this situation is F4) EUR/AUD Weekly – Exit “I am a forex trader” or “I only will enter if they trigger. “why not just focus on markets trade the Russell intra-day”. I use People are often amazed when that are trending right now to focus purely on one or two I say that I will scan through and ignore the rest? Stack the markets but as part of one of my approximately 500 stock charts probabilities in your favour by “aha” moments, I realised that the by eye without the use of any only trading trending markets”. best method for me to be able to automatic scanning tools in less Whilst that might seem like a find my one or two perfect trades than 20 minutes. But if you are small edge, I have found that it each week would be to scan strict on what essential factors is sometimes the most obvious across a large number of markets must be present before you things that traders ignore and and timeframes. I only have five would even consider entering a that is why they struggle to make set ups that I am looking for, and The trade was broken into two parts with the first half being closed out set up then this will dramatically consistent profits. for a 1:1 reward to risk and the second half‘s stop was trailed down to nearly all of them are applicable decrease your scanning time. the new lower swing high where it was finally stopped out nine weeks to any market and any timeframe. TRADERS´: Please could you after entry. So regardless if I am looking at a TRADERS´: What is your edge describe a few of your trading Source: www.tradestation.com forex, commodity or stock chart I in trading? strategies/setups?

04/2011 www.tradersonline-mag.com TRADERS´ PEOPLE 73

Travis McKenzie: Let me chart structure is missing then I and then walking away from my introduce you to what I call my move straight onto the next chart. screen. I never enter this set up Precision Lifestyle Trade (PLT). The second essential factor is on a market order. The set up was specifically that price must be trending on I have no hard and fast rules for designed so it could be traded your set up chart and at least the my profit targets as I typically will F5) GBP/USD 15 Minute – Entry across any market and any next higher timeframe. I establish allow the chart I am trading off timeframe. It has eight essential trend by using detailed price to indicate to me where sensible factors and another twelve bonus action analysis. You do not need profit targets might be. This factors. I am happy to discuss a fancy indicators to tell you if a could mean I scale out half of my few of those factors for you. This chart is trending or not, all you position at a reward to risk of 1:1 strategy can be traded long or need to know is contained in the and then trail my stop below the short, I will just discuss the set up price action itself. most recent swing low for the on the long side. You will notice in The third essential factor is that remaining half. Or I might go for a the screenshots I have provided price must have pulled back to much bigger run on my first half that I have cut off the axis so you what I refer to as the buy zone. before scaling out. It is important do not know what timeframe or This is based on a combination of that you let the charts tell you market I am taking the trade on. price action analysis and moving where to put your profit targets I do this on purpose because I averages. and not try to force your opinion am trying to reinforce the point The fourth essential factor is Personally, I prefer the PLT strategy on 60 minute charts and above, or rules upon the market. but this is a classic example how it can still be used to trade the lower that a chart is a chart and it does that you need a small candle to As my stops are reasonably timeframes. not matter what market or what form in the direction of the trend, tight for this set up, it means Source: www.tradestation.com timeframe it is as I will still trade i.e. green candle for a long. the win to loss ratio is reduced. the strategy the same. I have In addition to these four But I find this is more than provided the live screenshot I factors I have another four compensated for by a very took as I placed my entry orders. essential factors that must be high reward to risk ratio. So it is F6) GBP/USD 15 Minute – Exit The first essential factor which present before I would even important with a strategy such as I apply to all my strategies and consider taking the set up and this that you let your winners run which assists in dramatically another twelve bonus factors as far as possible. reducing scanning time is to only which will tell me which of those trade markets that are currently trades that passed the essential TRADERS´: Do you also scale showing what I term optimal chart factors are the very best trading into positions? structure. What I mean by this opportunities. Travis McKenzie: No, I do not is that I want to find a smooth My entry criteria is very simple. scale into positions. flowing chart that is trending I am looking for the next candle or ideally just starting a trend. I to break the high of the set up TRADERS´: Please could you do not want charts that have a candle. I will place a buy stop briefl y outline your risk and history of gapping, erratic price one tick above the high of the money management? action, long tails on the candles Once again the key to the strategy is to lock in a breakeven trade by set up candle with my stop one Travis McKenzie: I absolutely will scaling off half at 1:1 and then trailing the second half‘s stop for as or no trend. Regardless if a chart tick below the low of the set up never risk more than one per cent long as possible with the hope of catching a big trend. meets all of my other remaining candle. In order to free up my of my trading account (often it is Source: www.tradestation.com seven essential factors if optimal time I am setting my orders up actually much smaller than one

04/2011 www.tradersonline-mag.com TRADERS´ PEOPLE 74 per cent) on any one trade and I are plenty more great set ups just UK stock markets are my two unless you can test and measure above. So I would encourage all will never have more than three around the corner. preferred markets as they fit in what you have been doing in the traders who are not at the level per cent of my account exposed well with my lifestyle and when I past. they would like to be with their to one asset class at one time (i.e. TRADERS´: What is the course wish to trade. trading to sit down and spend a no more than three equity trades of events on one of your typical My style of trading leaves me TRADERS´: Any comment on good day really thinking about open or no more than three Forex trading days? with plenty of spare time to spend trading psychology? those three points. I know I trades open). Travis McKenzie: I typically scan on my other business interests Travis McKenzie: In my opinion would have shaved many years I am a big believer that you the forex and commodity markets such as Trade With Precision. trading psychology is all about off my journey to becoming a must stack your reward to risk about five times a day. I try to your focus. Traders usually are professional trader if someone in your favour so as a minimum evenly space my scans out over TRADERS´: What has been the focusing on the wrong aspects had explained those three points I aim to make at least a reward the time from when I wake up in hardest part in your trading? of trading and this is why their to me at the start of my trading to risk of 1:1 but typically I aim the morning until I go to bed at Travis McKenzie: It is definitely psychology is all messed up. career. to make much more than this. If night. Each scan only takes me taking screenshots of every trade For example at the end of each you can do that consistently it about 15 to 30 minutes so this is I take and then reviewing those week I do not look at my profit TRADERS´: How do you enjoy will mean that even with a win to not a huge drain on and loss and decide your free time? loss ratio of only 50 per cent you my time. from that whether or Travis McKenzie: I typically will will still make money over a large When trading not I have had a good take up to four weeks a year of sample size of trades. stocks I always In my opinion trading trading week. My sole holidays. When I am on holidays ensure I am at my focus is on whether I like to close all of my open TRADERS´: What kind of orders screens for the first psychology is all about I flawlessly executed positions so I can totally switch and stops do you use? 15 minutes of the my trading plan for off from the markets. My favourite Travis McKenzie: 99.9 per cent session. The reason your focus. that week. Without holiday is either spending time of my orders to enter trades are being I do not like live screenshots of in the mountains snowboarding either stop or limit orders. I very to place orders your trades and strict or laying by the beach reading a rarely use a market order to enter outside of market hours just in screenshots in conjunction with checklists you are unable to book. a trade. As I have discussed case the stock I am thinking of my trading rules at the end of do this and consequently most I have very strict criteria for trading gaps the next day on each week. It is the one task that traders use their profit or loss TRADERS´: Will you ever stop entering a trade and this allows open. If you have your orders in has had the most positive effect for the week to guide them on trading? me to identify trades in advance, the market you may be entered on improving my trading but it how well they traded that week, Travis McKenzie: Never. I can put my orders on and then walk into the trade at a much worse has also been the thing that has which in my opinion is a very bad see myself being in my 80s away from my screen. price than you wanted. I am very taken the most discipline. The guide. Focus purely on flawlessly and still trading the markets. It In the past I found that when I strict on my money management reason being that it is typically executing your trading plan and has been a lifelong passion for was using market orders it was rules so I have to be 100% sure the last thing you feel like doing most of your psychological issues me and I love the challenge it because I had actually missed that I am getting in at the price I on the weekend or after a hard with trading will disappear. provides me. the ideal time to enter the trade want. But once the markets have day but it is so vitally important and I was now chasing the price opened and I am happy that the to any trader’s success. I TRADERS´: What do you think This interview was conducted by as I was scared of missing out on stocks I am watching have not honestly believe that if any trader are the best ideas for new Marko Graenitz. a trade. If I now identify a trade gapped I will then put my orders incorporated this one task into traders to start with? but it has already past my correct on and walk away and I typically their trading routine they would Travis McKenzie: It took me many entry level I am more than happy will not look at them again until see dramatic improvements. It years of losses before I had my to let it go because I know there the next day. The Australian and is nearly impossible to improve three “aha” moments discussed

04/2011 www.tradersonline-mag.com TRADERS´ COLUMN 75

me with the DAX, too. I wanted consumes as much energy Boredom will result in actions it to talk to me non-stop – to as a muscle. When markets that serve to stimulate your mind tell me which direction it would stagnate for days or even weeks, but not your account. go and ideally, to be forced to there won’t be any stimulus. Those who engage in intraday communicate. Incidentally, 85 per The need for at least the trading ought to consider whether cent of stalkers are men. And are occasional stimulant is shown the next trade will offer a suitable not the vast majority of traders by trials during which people risk-reward ratio or whether they male as well? were prevented from dreaming just needs a little entertainment Stalking is not yet an officially permanently. Dreamlessness for for the moment. It is only a small recognised medical condition, a longer period of time generates transition from a professional though most stalkers are “a little pathological tendencies during trader to a gambler. Most crazy”. Pathological behavioural the thought processes of the traders are not even aware of the patterns suggest that a trader awake state. circumstances surrounding the engaged in permanent intraday The intensity of the stimulant creeping transition, which means trading is liable to have mental leads us to trading. There is that the issue is one of avoidance. problems at some point down practically no trader that does Basically, each trader should find the road. Thus, sitting around not require an extra stimulus. his own personal solution. for hours on end That is the structure of a trader’s My personal solution is that actually is nothing character, resembling that of I decided a long time ago not but professional a gambler looking for frequent to intensively track any markets Are You a „Stalker“ too? boredom – followed and strong stimuli – more so intraday for hours. Obviously, by excessive activity than the average human being. that does not mean that intraday with rocket-like That is why traders and poker trades are taboo. It is enough to market movements, players share so many character concentrate on one to two trades For years, I was one of the during which one is much too traits. And that stimulus can be a day. Ideal examples are gap Christian Lukas stalkers – or more accurately, slow to react properly. I maintain increased at will through the size trading or trading at predefined the trading stalkers. Day after that market extremes are of your capital employment. If times of day. For example, let us Mr Christian Lukas holds a day, hour after hour, I would sit something that the human mind traders sit at their computers take trading in the DAX future or in Master’s degree in Engineering in front of my screen tracking the cannot put up with. too long without the market the EURO STOXX 50 future. Those and has been studying the DAX. Working meant searching, A largely underestimated moving, they will create their who only concentrate on trading stock market since 1998, watching, and trading, and there core problem is trader’s ennui. own stimulus. They will enter between 9 am and 12 noon should specialising in volume-based were times when I loved the After all, people’s gut feeling the market by broadening or find sufficient opportunities to trading. The centrepiece DAX. Actually, that is what the is that just sitting around while relaxing their personal trading enable them to realise continuous of volume analysis is the conventional stalker does, too. He watching is unproductive work. rules, which causes them to profits from the markets. This divergence between price flow tracks a person, watches her, and Neither small children nor act outside of their typical risk- involves full concentration for just and volume flow. Consequently, sometimes even loves her. The adults are capable of sitting reward ratio. You do not have three trading hours, and you will the trading systems he himself most important characteristic of still for hours on end. Our brain to think long about this kind be much less emotionally drained. developed are based primarily a stalker is that he tries to force requires constant activity and of trading to understand that on divergences. Contact: info@ an unwanted communication seeks stimulants. Even in our this tends to be more on the volumen-analyse.de or closeness on a person. That sleep while muscles are resting, destructive side and rarely yields is exactly what it was like for we are dreaming and our brain positive results over the long run.

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