- former colonies of the British Empire hundreds of years ago

- to rebel colonies defying the crown

-a new independent fledgling nation; that had to repel the British Empire a 2nd time roughly 40 years after the Revolutionary war

- to major player on the world stage and youngest country to achieve “super power” status

What is sad to note though is just how much we’ve seemingly lost faith in the ideals, beliefs and principles that our forefathers once shed blood and tears for to found and establish our young nation…proving to the world that we deserved our independence and were not afraid to do what was necessary to keep it. At the time, independence meant freedom to determine our own destiny unhindered by the British crown. This eventually expanded to mean independence from any other sovereign nation that would mean to do us harm or to hinder our ability to grow and prosper as a nation – as a people. Present day, I think this also means independence from any group or entity that threatens our security and ability to live as Americans.

And this is not an American thing – independence and freedom is something anyone and everyone should have if they want it.

But what ever happened to our American conviction – our belief in ourselves and in the underlying principles on which our nation was founded? What happened to the pride we used to have as Americans because we believed in our country’s guiding principles?

I know we don’t have a spotless record as a nation for always making the right decisions. But please tell me of a nation on this planet that has? And we as people – who among us in our everyday lives have made perfect decisions everyday? The answer is obvious – and dragging our country through the mud for every wrong doing without celebrating all the good things it has done is clearly a one-sided and inaccurate viewpoint.

How would you like it if you were nagged for everything wrong you’ve done in your life but never praised or recognized for the good you’ve done? I think you’d probably hate it.

My point is, lets stop doing what is “fashionable” lately (as seen in the media and as practiced by everyone from Main St. America to Capitol Hill)…that is, blaming our country and focusing on mistakes like it was going out of style. Let’s once again take the high-road and focus on what we can do to be better and celebrate our nation’s achievements. Lets be proud of what our nation, at its foundation, represents and remember that it is good. You don’t have to agree with everything being done in Washington D.C. – but at the very least believe in the principles our country was founded on. We the people are the only ones who can set our nation on the right course…don’t depend on the politicians to do our work. The people, since day-one of our country’s existence, were in the driver’s seat – not politics or the politicians.

Fly those flags high on this day and believe – and if you don’t have one, get one.

Happy independence day America.

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Sovereign Debt “Crisis” = Markets Getting Weird

What changed about the market last month that caused my tried and true trading approach to become less effective? No conviction (no follow through) and lots of head-fake moves as the markets tried to digest / sort-out what was going to happen with Greece. As of today, the markets are still trying to figure it out since no one knows how deep the issue goes beyond Greece (ie. Spain, Portugal, etc.). Meaning that if the issue goes beyond Greece’s borders then the “bailout” package planned for Greece only addresses just one problem cog in the Euro machinery. With that said, last month was when I cut myself off from most social contact and other non-trading related activities so that I could figure out how to get back in-tune with the market.

For those not familiar with how I trade, I use the 4-hour chart time frame to look for my trade setups. And on this time frame I wasn’t seeing the same kinds of setups and or follow through that I was used to getting up until April. Instead, most of the action was very abrupt, wishy-washy and didn’t present the same kinds of smooth price action that I would normally have targeted. This meant testing different aspects of my approach and finding out how to adjust. So began my forward testing.

I’m not a fan of back testing…I’m all about forward testing. This means putting real money experimental trades at risk in order to learn what works and what doesn’t in the heat of battle (none of this hypothetical “it would have done this” back testing stuff). The downside with forward testing is that you will tend to lose money until you figure it out. The huge upside to forward testing is that you tend to learn very quickly (or risk going broke) and once you’ve found a solution you know it will work in the real-world and not some virtual world based on historical data.

The solution I discovered for me: trade a time frame one-magnitude smaller than what I was trading. I consider one-magnitude as a time frame multiple roughly 5 times bigger or smaller than a particular time frame (I thank Dr. Alexander Elder for introducing me to this concept via his writings many years ago). So in my case, one-magnitude smaller would mean the 45-minute chart time frame (my charting software allows for this custom time frame). Nothing else, for the most part, needed to be changed with my approach – trade setups and money management essentially remains the same (a testament to a simple but robust approach I’ve built over the years). Now, all I do is look for the same kinds of trades but on a different time frame chart and I’m back in business with the market.

Since moves in the market were not as long-lived as usual (due high levels of risk aversion the markets were not as willing to make a strong bet one way or the other – exception, EUR selling off) and moves suddenly happened without forewarning or any technical reasoning, it only made sense that I look for smaller moves that would be clearer to see on a smaller time frame. After some getting used to, I was finally able to time my entries and exits on the smaller time frame and returned to a normal level of successful trading. I suspect that at some point in the future I should be able to bump back up to the 4-hour time frame again once the market reverts back to some kind of “normal” rhythm. But until then, I will be staying put with my newly re-tooled approach until the sovereign debt storm blows over.

Moral of the story, be constantly aware of what is working and not working for your trading approach and adjust when necessary. Because one day it might just save the health of your trading account.

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Building on an earlier post regarding discipline, one of the most understated items about being able to trade successfully is keeping one’s mind flexible enough to see both sides of a trade without being attached stubbornly to one view or the other. Doing this will help you not only become a better trader but also allow you to potentially open your eyes to other opportunities that might also fit your trading approach.

Discipline, both mechanical and emotional, will only go so far. Discipline is what will allow you to pull the trigger and trade per your plan consistently. But without a clear unbiased mind you may fool yourself into seeing trading opportunities that aren’t really there – the entire time thinking you’re following your plan but based on a faulty perception / interpretation of what the market is really telling you.

This is something that I still occasionally have challenges with. Thankfully this isn’t as big an issue for me as it used to anymore because of many years of self-training and being aware of my state-of-mind (and pain due to many trading losses). You can definitely keep it in check as long as you’re honest with yourself and aware of it when it happens. A trading journal will definitely help in this regard (keep one if you aren’t already) if you make sure to make a note of your thoughts and feelings about the market and your trades each day (whether you trade or not). If you review this regularly (at least once a week) you’ll start to develop a skill for knowing when your mind starts playing tricks on you especially in the heat of the moment when trading or anything else in life for that matter.

As with anything else, with practice you will have this mastery over yourself and coupled with the discipline to execute your plan you’ll be on the right track to a long trading career.

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Though I have been trading and trying to get back into a regular rhythm with Twitter, I haven’t been inspired to blog up until now. I have actually been approached by a couple of commercial deals as it relates to my trading for which I’m considering though not entirely sure if it’s worth it if it disrupts my focus on trading. In any event, I’m considering the opportunities and will make up my mind eventually.

Also for my own benefit, I’ve decided to add a different spin to the blog (and maybe a face-lift too). I love trading but I also have other sides to my personality and interests for which I’d like to entertain. So I will expand, just a little at first, the kinds of things I’ll post about in my blog…non-trading related but hopefully entertaining. As always, I welcome any feedback you might have on the trading and upcoming non-trading stuff I blog about. Anything I can do to keep things interesting and fun for everyone reading is fair game to me.

Thanks again to everyone who has contacted me via the blog and Twitter over the months. I’m glad you’ve enjoyed my humble posts/tweets and I hope to keep it going in the months to come.

Cheers!

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This has been a very solid year for me all around…trading, socially, health, etc.

I’m very thankful for the year I’ve had and looking forward to doing it again in 2010. As I write this post, I’m going to be bringing in the New Year thousands of miles away from home in the beautiful Philippines. Experiencing the joy of the people here for this day is a great feeling and is a reminder of remembering to experience life outside of trading. Though truthfully, trading has played a big part in my being able to enjoy days like today.

As soon as the festivities have settled, I’ll be blogging about what I feel is the trading challenge I need to tackle in 2010 and some perspective on how it might be helpful for all you other traders out there.

For now though, I wish all of you and your families well – much prosperity and the best of health…Happy New Year!

~EJ

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Unexpected events like those due to geo-political events or natural disasters are the type of event-risk one just has to suck-up and deal with if and when it happens. Event risk though that is expected like those associated with economic data releases can be managed by preparedness. Even though you have no idea how the market will react to news regardless if the news comes out as expected or not, you will be prepared with the knowledge that the market could get very weird just before and after the news is released. How should one approach these types of days?

Assuming you make decisions primarily off of price action (tape reading), you should continue to interpret the price action as you would on any other day, everyday, leading up to the day of the event. The reason is that the market at times will setup good trades hours before a highly anticipated news release (like Non-farm Payrolls – NFP). So even though the price action may become senseless or chaotic just before (minutes) and after the news release, you will have hopefully identified trade setups to jump into hours, maybe even days, before the news is announced. Rule of thumb, the price action tends to be more real and true hours or days leading up to the news release. The minutes or couple of hours just before a release are usually quiet to completely erratic or senseless movement…no amount of technical analysis will tell you anything about what the market thinks when it’s this close to the actual news being announced.

From experience, I think that trades identified on a slightly larger time frame of charts (anything greater than One-hour charts) tends to give you less risky plays. The reason being that stop points identified on larger time frames will tend to be far enough away to not get whipsawed by the crazy action that takes place just after the news is released. Prices can swing around like crazy depending on how the market interprets the news. Sometimes, a 100-PIP stop may not even be enough to protect you from being whipsawed. But depending on your time frame for trading and general experience you have with your approach, only you will know whether or not a potential stop point/level will be an easy target for the kind of violent action the market sometimes has on these news releases.

I will almost always hold onto a position through a news event especially if I got into it way before a news release. I will only get out if the price action tells me to get out before the news release happens. If your analysis is correct, then the market should continue moving in the direction you expect regardless of the news since one-piece of news is unlikely to make a macro trend reverse. The exception to this is if you’re trading on very small chart time frames whereby the market doesn’t respect any of the micro-trends and will cut through levels like they weren’t even there. Bigger time frames are better if you want the confidence to hold onto trade through news.

For the relatively new trader, I’d recommend you size your trades down to as small as you can trade while you learn how survive volatile news events.

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My cousin and fellow rounder, the one and only “T”, had the usual conversation…discussing poker, trading and what each of us was doing to become better at each one respectively. Of course, the conversation always leads to how similar the attributes needed to do well at one are directly applicable to doing well at the other. And this of course shouldn’t come as any surprise since both activities involve putting money at risk and pitting your skills against the skills of other “players” – with trading this means other traders.

A very good read that hits on many of these similarities (and for the most part I agree with the article) can be found at WallStCheatSheet.com here.

The attributes that I think are the hardest for most people to master is discipline. Once you have the framework of your trading approach (ie. entries, exits, money management, risk capital, etc.) in place, you need to have the discipline to carry out the plan with solid emotional control so that you can succeed and do well at it. Any lapse in judgement or with one’s emotions (read about a recent lapse I had in a previous post, “A Lesson in Sicking With the Plan“) that is allowed to run unchecked will eventually lead to your ruin.

Discipline is required to consistently carry out the following in trading:

• Mechanical Aspect - Executing the trading plan; maintain level-headed decisions
• Emotional Aspect - Keeping emotions (fear, greed, euphoria, etc.) under control

Controlling the emotional aspect is the most important because without it you won’t do very well at carrying out the mechanical aspect. Basically, if you’re allowing decisions to be influenced by emotional extremes that everyone faces from time to time, it’s less likely that you’ll be able to make clean level-headed decisions with regards to reading the market or handling your trades. Being able to make rational decisions consistently over time is necessary for any successful trader. Having a lapse which leads to a mistake every now and then is simply being human…but you can’t let it get out of control. Recognize a lapse when it happens, make a conscious effort to prevent it from happening the next time, and learn from the experience.

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Here is what happened…

• I was already down a little for the week as of yesterday
• I held a couple of trades from yesterday into the morning comfortable with the risk represented by this month’s NFP report due at 8:30 AM
• 7 AM – When I first checked-in on my positions I was in the money with both positions (before NFP data release) – floating at roughly break even for the week
• 8:30 through 8:45 AM – An extreme price swing first down then up in my positions’ favor took place
• At this point, I had a $1,000+ price swing up
• 8:45 through 9:15 AM – The market sold off from its highs back to or slightly below pre-NFP release levels
• Despite the market’s strong swing back in my face, my trading rules were telling me to stay in but I didn’t (big mistake)
• My rules define certain price levels that must be broken to the downside to justify getting out of these positions; these levels were fine and no where near being touched
• Instead, I started to second guess my levels/approach and felt that it was time to get out because of how strong the down-move looked
• I didn’t want to part with all my gains from earlier and plus I thought I was outsmarting the market by ignoring my rules (what was I thinking)
• By 9:30 AM I had closed out my positions for small gains – the market trades lower and I decide it must be time to short so I shorted
• 10 AM – the market begins to rally and recover back above pre-NFP levels; I cover my shorts for small losses
• I watched in disgust as the market for the positions I originally had (but down own anymore) rallied hard and eventually touched my upside targets
• The targets represented a $2,500+ profit area for me – had I not foolishly gotten rid of them on a whim (ie. breaking my rules) earlier in the morning
• Now all I was left with was a sick feeling in my stomach and back to playing catch up next week

Not all is lost – there were a few good points that came of this:

• This day reaffirmed how effective my trading approach is – I shouldn’t second-guess it
• I didn’t make the mistake worse by making more mistakes
• This mistake didn’t cost me much money – I’m well within position to overcome the loss

So although it was personally disappointing, I was able to realize what I did wrong after the fact so that I can adjust my game/mindset for the next time I’m tempted to break the rules. Plan the trade and trade the plan…don’t try to outsmart the market.

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This is because there is no one order book in the FX market (there is no central exchange for FX trades) as there is with equities, futures, etc., – that means there is no one official source of all global trading volume or trades done like there is with other markets. Every market maker has their own volume numbers based on the deals they’re doing directly with other market makers or on behalf of their retail clients (see post, “Behind the Closed Doors of FX Market Makers“). Because this information is fragmented, you have no real way of knowing if the FX pair you’re trading is starting to be overbought/oversold as you might with traditional equity trading.

Retail FX market makers offering platforms that show multiple price levels (appearing like Level II screens in equities) are not true Level II. First, the levels don’t show you who the market makers / banks are behind each price quote/size – it’s anonymous. So trying to read which “players” are buying/selling for the day in a particular FX pair is not possible. Second, their levels show the prices/liquidity being made available via their platform only – it’s not showing total global liquidity as one would find with equity Level II screens. So if you think trading on this type of FX platform will give you the same kind of edge that equity traders have, think again. At best, it will allow you to be able to tell how deep the liquidity goes relative to the pricing available so that you can best anticipate how likely your large order (usually orders bigger than 5 mil.) will get filled.

Anyway, the point is you’ll be a better trader avoiding an overbought/oversold mindset. Just stay neutral, read the tape, and let the price tell you when it might be done  rising/falling. You won’t be right 100% of the time but at least you won’t be leaving money on the table by selling or covering a position too early just because you think a pair couldn’t possibly go further (ie. overbought or oversold).

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Like Einstein said, it’s all relative (though I don’t think he has ever once touched a trade).

The best chart time frame you should be studying depends on the style of your approach and how long you typically want to hold a trade open. In my case, I study multiple time frames but my core time frame is the 4-hour. This means that I look for trade setups developing on the 4-hour chart and use other time frames (larger and smaller) to  make sure I’m trading with the macro-trend and fine-tuning the timing of my entry relative the 4-hour respectively.

For example, when trading FX I typically expect for my positions to work out one way or another within a few hours up to as much as a couple of days or so. This is all relative to how long moves take to develop on my 4-hour time frame. So, if it takes 6 four-hour bars on the chart for my trade to develop that’s 24-hours worth of time passing of me holding onto a trade. Six bars on a chart regardless of time frame is not very much data…again, it’s all relative.

The cool reality of this is that you can find setups on any time frame. For example, if you look for a break out move to develop on a 1-minute chart then that means you’ll typically be holding onto the position for several minutes to maybe up to an hour at a time. On the other hand, if you look for moves on a Daily chart then you’ll be holding onto trades for days up to weeks at a time. In both cases, you can make money as long as you’ve done the right analysis relative to that time frame.

I prefer the 4-hour time frame in FX because it’s slow enough to not be hyperactive trading but setups happen often enough each week to keep me interested/engaged. The lifestyle I like is being able to have free-time to do what I want. So, not being tied down to my computer every minute of the day monitoring trades or the market is more of my preference. Anyway, I have a completely mobile setup so I could take my laptop with me and trade outside my home if I need or want to from pretty much anywhere as long as I have a signal for my cell phone.

Feel free to share your insights on this or ask any questions you might have by using the comment section below this post.

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