But back on point.

This is also the time I open my online course up to new students. I only do this 2-3 times a year, so if your trading isn’t where you want it to be, I encourage you to sign-up. Tuition for the 90-day course is very reasonable.

Registration closes Friday (Sept. 10).

Learn more and sign-up here:
http://www.theessentialsoftrading.com/course/web.html

Essentials Course Open – 5 days only

Wall Street Warriors episode videos

Upcoming Seasonal Patterns

Excellent New Book from the SFO Magazine Publishers

Is it still feasible to trade forex?

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Hi John,

I know you are a position trader in the stock market, using a variation of CANSLIM. You are a day trader in ES, using Market Profile. I think these are great ways to approach these markets. That’s why I would like to know how do you approach the Forex market:

- Are you a position trader? If so, do you scale-in or pyramid to build large size or do you difersify as much as possible?

- I know you use weekly Bollinger Bands and forex seasonals, but is that enough to time your entries or do you use other tools or analyses?

Thank you.

Rod

Before I talk about my forex trading, let me back fill a bit for those who haven’t followed my work. The strategy for the individual stock trading I do – which Rod correctly notes has CANSLIM as it’s foundation – can be found in an appendix to by book The Essentials of Trading. It is a strategy which combines technicals and fundamentals, and I figure on holding positions for 8 weeks when I put on a trade. The ES (mini S&P 500 futures) trading I do definitely utilizes a Market Profile approach, though I wouldn’t strictly call it day trading because I do sometimes carry positions overnight.

Now, as for forex, I do like being more of a position trader, holding trades for weeks or even months to catch good-sized trends. Sometimes I also play more swing time frame trades. Regardless of the time frame, though, my approach is basically the same. I use the Bollingers to find situations where a new trend looks likely to develop, pretty straightforward chart analysis to identify entry and exit points, and the attractor ideas from Market Profile to identify likely target points.

As for the forex seasonals, I use those to bias or filter my trading, especially the more swing oriented positions. For example, if a pair I like to trade is biased higher in September I’ll look for good long entry opportunities. I’m also planning some research into more mechanical strategies there.

In terms of scaling in and things of that nature, my history has been mixed. I’ve definitely had some times where I’ve added to positions as a trend unfolded in my direction. Other times I’ve just gone the all-in route from the start. I’m not a diversifier specifically. I do look to avoid getting overweight in any specific risk area (like being too long or short a particular currency), but because I tend to focus on one position, or at most a small number of them, at a time it really isn’t an issue very often.

Is it ok to leave a trade open more than one day?

Is it investing? Or is it trading?

Decembers Most Delightful

Do you know a good end of day strategy?

Make Your Trading Questions Answerable to Get the Most from the Answers

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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The CFTC has finally come through with its new rules on retail foreign exchange, which come into effect on October 18th, 2010 (Q&A about the new rules can be found here). Despite fears to the contrary, the CFTC will not be cutting permissible leverage in retail forex trading down to 10:1. The people have been heard! There was so much contrary opinion against that move from traders and brokers that the regulators were forced to rethink the plan.

That said, the CFTC will, however, be restricting leverage to no more than 50:1 (2% margin requirement) on the major currencies (5% on regional currencies). This is basically taking the NFA restriction put in place last year for 100:1 max leverage and tightening it up. I’m sure that’s going to have some folks up in arms, but the reality is that most of your better traders never go much beyond 10:1 actual leverage. Further, one of the biggest forex brokers out there, Oanda, has never permitted more than 50:1 leverage.

I know this won’t have any impact on my trading, nor encourage me to move my account outside the US. What about you?

Take a Breath Folks. Forex Leverage Won’t Be Cut to 10:1

New NFA Retail Forex Leverage Restrictions

New NFA Forex Leverage Limits In Effect Today

Increasing Regulation of Retail Forex Trading

More New Margin Requirements

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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I’ve only read chapters 1 to 4 and I must say it is one of the best if not the best work I’ve read on trading, its honest and provides years of experience to the reader. I’ve only been trading a few years, managed to keep my original capital, luckily, and I wish I read something like this years ago.

Wow! The best, or at least close to it? It’s hard not to be happy with that kind of response. The “honest” and “years of experience” parts are exactly what I was going for, so it’s good to hear that’s what’s coming across to the readers.

Here’s the one that really hit me, though:

For me it’s kind of a Market Wizards lite in the sense of getting to see how traders THINK and organize things in their heads.

Anyone who’s been following my writings and trading educational efforts for any period of time knows how highly I rate Jack Schwager’s Market Wizards books (which also includes The New Market Wizards). I always recommend them to new – and even not-so-new – traders when the topic of trading books comes up. Someone equating the FAQs book with Market Wizards, even just a little bit, is amazing to me. I consider it very high praise and it makes me blush.

I actually got to meet with and interview Jack Schwager back in 1992, shortly after the first Wizards book was published. I can’t imagine he had any idea how big it would become when he wrote the book. If my FAQ has even a tenth the impact Jack’s books have had, I will be a very satisfied author and educator.

Learning from the Market Wizards

If You Haven’t Already…

Trader’s Wish List – Second Installment

Trading Education is Not Just About Trading Systems

Book Review: Trend Following

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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And lest you think the patterns don’t really add up to much, here’s the equity line for a very, very simple system I created based on those patterns.

The system plotted above was based on EUR/USD trading using dollar calendar patterns on a simple buy/sell at the start of the period and exit at the finish approach. No filters. No indicators. Nothing else. I just did it to demonstrate how influential the “seasonal” patterns in the forex market really can be. You can integrate the data into your own trading systems or strategies.

Learn more at www.forexseasonals.com

Forex Seasonals Coming Up Big So Far

September Seasonal Market Patterns

Forex Market Seasonal Patterns – Really!

Forex Seasonals?

The Relationship Between Stocks and Forex

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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This book is largely a practical text focused on application. The author outlines a very specific strategy for deciding whether the stock market is to be considered in an uptrend, downtrend, ranging, or turning. His “dashboard” comprises a collection of indicators which are very much technical analysis oriented. They include market breadth indicators, sentiment readings, and some basic price studies. The scoring of the indicators provides the user a market reading from which to develop a strategy. From there, Masonson moves on to picking the best trading/investment vehicle based on relative strength readings. In other words, it’s very much a top-down approach.

On the plus side, the author is very good about explaining the various methods he employs in his strategy. He suggests specific tools (most free, some paid, but not necessarily required) and walks the reader through applying things. On the negative side, much of the first third of the book is dedicated to proving how bad an idea buy-and-hold investing is - definitely overkill there – and I thought in general the writing could have been better. Also, while Masonson does demonstrate the value of the dashboard indicators he uses, he doesn’t actually show a good historical look at how the overall strategy would have done. Still, it’s a book which can certainly provide the fodder for research and development for those interested in longer-term stock market trading/investing and/or asset allocation between and among markets.

Make sure to check out all my trading book reviews.

Calculating Relative Strength

Book Review: The Motley Fool Million Dollar Portfolio

Book Review: How I Made $2,000,000 In The Stock Market

Book Review: Trend Following

What do you suggest is the best way to trade fx markets?

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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His premise on the use of correlation is a stretch — made even worse by his mis-understanding of what arbitrage means — poor traders who decide to follow him… If he is correct, it is by happen-chance, not analysis

On to some more positive things.

Independent Trading: Pros & Cons is a great post on the Kirk Report blog looking at both sides of the trading game.

Mark Wolfinger has a solid discussion of money management on his blog. It has an options spin to it, but the concepts are universally applicable. Mark also wrote on the topic of trading mistakes, which is a post worth reading. (Note: Mark is also a contributor to my Trading FAQ book)

What Does This Chart Tell You?

A few useful links

Insider Trading Secrets and Conspiracy

Individual traders who call a bottom are generally wrong

Seven Snappy Trading Snippets of Essentials Past

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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Tim Says: The unlimited profit potential in the hugely liquid and leveraged forex market is pure marketing and deception, designed to lure the most desperate and greediest people into playing a game where the odds of success are very low similar to playing the lottery.

I won’t disagree that the marketers have a field day going after new traders by trying to hook them in on the big profit potential. The forex market does offer opportunities to small traders in ways most other markets don’t, but I definitely could do without the sales pitch I see a lot of brokers and system markets putting out there. It’s worth noting, though, that penny stocks have at least as bad a track record here, and a much longer one at that. I’m not suggesting penny stocks should be avoided. I’m just saying that both markets have been subject to some shady operators taking advantage of people.

As for the odds being similar to the lottery, that’s pure hyperbole.

Tim Says: Because Forex is so liquid and leveraged, those who succeed are the smartest, richest and most well informed people on the planet, aka George Soros and his friends.

Tim’s big point here seems to be those who attempt to manipulate the penny stock market are idiots, but the big players in forex are super smart. Tim has a strategy for trading penny stocks that works against the manipulators, and it’s one he’s had considerable success with over the years. I won’t challenge him on that part of the equation. As for forex, though, the very size and liquidity of the market makes the sort of manipulation Tim feeds on in the penny stocking world a much less workable prospect. Besides, I hold the view that an individual trader need not play in the same pool as the big boys, and can be at least as intelligent and informed where longer timeframes are concerned.

Tim Says: Forex prices move very quickly and the reaction to breaking news happens within seconds and minutes.

That’s true for any market these days, but Tim is trying to make the point that the manipulation in penny stocks which he plays off takes time to build up. I’d argue that the good trends in forex trading also take time to develop. No need to be playing in the short timeframes where news has a significant impact if one doesn’t want to do so.

Tim Says: Penny stocks are simpler. While forex prices gyrate wildly due to rumors, news and those anticipating the rumors and news, volatile penny stock chart patterns are truly straight up and then straight down with very little variation.

Hah! As if penny stocks don’t react just as wildly to rumors and news. In fact, on a straight up % change basis they move WAY more than forex rates do (see Looking at Volatility Across Markets).

Also, forex traders don’t need to worry about pattern day trader rules and have no constraints against taking short positions.

Tim Says:  Penny stocks have greater odds of success.

First, this is a meaningless statement without the figures (on both sides) to back it up. Second, as I’ve repeatedly noted, win % is only part of the performance equation, and not a determinent of it by itself. Tim mentions a 75% win rate for the types of trades he does, but I can demonstrate how even that win % doesn’t mean a winning system – and that’s not even talking about risk management.

My bottom line has always been that traders need to trade the market that suits them best. For some that will be penny stocks. For others it will be forex. I certainly have a professional interest in the foreign exchange market, but I don’t think it’s inherently better than the one for penny stocks, or vice versa.

Penny Stock Research

Trading vs. Gambling

Where’s the Money, and Where’s it Going?

Opening Gap – Will it hold or will the market retrace?

Fighting the Ignorance of Traders Who Claim They Know

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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1. They plan every single trade. EVERY SINGLE ONE.

2. They stopped trying to pick tops and bottoms years ago 

3. They are patient with winners – and ridiculously impatient with losers.

4. They trade one market. ONE

5. Their benchmark for success is anything but money

The first observation is a very simple restatement of “plan your trade and trade your plan”. If you don’t have a specific plan going into a trade you are gambling. We traders are not in the business of gambling. We are attempting to apply a methodology with a statistical edge over a large number of trades to allow that edge to create a positive return. That takes planning and consistency.

Tim’s second observation is a reflection of the fact that no one can know what the market is going to do for sure. Even if you are right about the market making a turn, shifting out of one trend and into another, the chances are you won’t get the timing exactly right. You have to realize that and account for it in your risk management.

The third item is basically “cut your losses and let your winners run” stated in another way. I definitely won’t argue the cutting of losses quickly side of things. If the market doesn’t act like you anticipated and you don’t get out of the trade, then you’re hoping it turns around. Hope is not something you want involved in your trading at all. Remember, you can always get back in. As for the letting the winners run, that depends on your system. Some systems have specific profit targets and not abiding by them could be problematic.

I’m not sure I can totally agree with the fourth item, trading only one market. If you are a short-term trader, then that certainly makes a lot of sense. As you get out the time span curve, though, adding in additional markets may make sense. For example, the Turtles traded numerous markets because that was the only way they could ensure a sufficient number of trades to make their system worthwhile. That’s really the key – the number of trading opportunities. You need them to be sufficiently large in quantity to allow the probabilities to work in your favor.

As for the final observations, I agree wholeheartedly. The money focus trap is a big one for new, low-capitalization traders especially. It leads them to take on more risk than they should. After all, when you only have $1000 in your account your gains or losses are only going to be so big in nominal terms. It’s hard to get excited about a $100 gain, maybe. If you focus on other metrics, such as % return, however, things become much more meaningful. That $100 gain becomes a 10% gain, which tells you something much more important. Also, a $10,000 gain is much less impressive on a $1,000,000 account, for example, than on a $25,000 account.

How can I stop abandoning my trades?

Some thoughts on new traders and their development

Should I Use Price Targets in My Trading?

Trading Systems Defined

Entering Trading Positions Around News

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What the FOMC said today about using the principal payment from the MBS and agency holdings to purchase longer-dated Treasuries is NOT NEW QUANTITATIVE EASING.

With all due respect – realizing that in some cases none is due – anyone who suggests otherwise is being a moron. (I do like Mish calling it “quantitative nothingness”, though)

The Fed is not expanding their balance sheet at all with this move. They are simply shifting assets from one category into another. Yes, the implications for the rates market are significant. That is a structural thing, however. If you shift from one asset to another, it is naturally going to cause an impact in pricing when you’re dealing with Fed-level size.

As Dennis Gartman noted on CNBC’s Fast Money program this afternoon (which I caught while seated in the barber’s chair), it means nothing anywhere else. Actually, let me correct myself. It does indicate the Fed’s unease about the current economic environment, but the markets already knew that. That’s why stocks, Treasury rates, and the dollar have all been working mainly lower the last few weesk.

Gartman was specifically addressing gold with his comments, however, and by extension the dollar. Those two markets tend to move in opposite directions in the face of monetary expansion because of currency devaluation/inflation concerns. Today’s action by the FOMC has no impact there because it didn’t change anything – and that’s the whole point. The Fed is keeping it’s balance sheet stable – no expansion or contraction of money supply. Had the Fed not decided to roll the principal repayments over it would have done the latter.

So we’re still in QE 1.0 as far as I’m concerned. When all the MBS/Agency/Treasury buying was going on there were all kinds of questions about the unwind. Letting the securities mature is a natural unwind. What the Fed did today was to tell us that they are not prepared to start that unwind process just yet. No new balance sheet expansion is going to take place, so we can’t say another round of QE is going to happen.

Does this open the door to a QE 2? I’d say that door was never really closed after the  QE1 purchases ended. It could still happen, though the odds are not good.

Here’s something to keep in mind. The Fed didn’t say anything about reinvesting the coupon payments from the securities they hold. Had they done that, and thus expanded the balance sheet in the process, I’d have called it a new round of QE. As it stands, every time the Fed receives one of those coupon payments it’s decreasing the money supply a bit. It’s not as big an amount as the principal would be, of course, but it is still a slow drain.

So why did the market’s react as they did Tuesday? Treasuries went up because the Fed will be buying them again. I didn’t see the figures, but my guess is that mortgage spreads may have expanded a bit as a result. Stocks rebounded some, but never really got close to going positive. The dollar took a hit, but was already working lower after some overblown gains earlier in the day. None of the moves really persisted much beyond the initial reaction, which tends to support my view that this isn’t a big deal. The implications of the Fed calling the economic recovery weaker than expected and not likely to improve any time soon are more important going forward.

P.S.: As you may have gathered, I actually wrote this Tuesday evening, but didn’t publish it right away to let my thoughts settle out overnight. Listening to things this morning, it sounds like a few more folks are of a view similar to mine (including BoE boss Mervyn King) given how they are avoiding the use of any variation in “quantitative easing” in their commentary.

Watching for a Market Explosion or Implosion

Predicting Fed Rate Policy with Fed Funds Futures

An Introduction to the Fixed Income Market

Where’s the Money, and Where’s it Going?

Which way is down?

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

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