Monthly Archives: February 2010

My Favorite Indicator

Here’s a recent question I received…

“If you had to use one indicator, and one only, which would it be?”

Simple… no thought required…

Keltner Channels.

Parameters set to (10,1.5) as my default, varying to (10,2) or (10,2.5) if necessary to ensure a nice snug fit around the price.

You’ll find some basic info here: http://en.wikipedia.org/wiki/Keltner_channel, but the best way to see them is to place them on your chart.

The original use of Keltner Channels as part of a trading strategy, so the story goes, was to buy when price closed above the upper channel line (indicating an uptrend) and to sell when price broke below the lower channel (indicating a downtrend).

I don’t subscribe to that theory.

Instead, I prefer to use a reversion to the mean concept. Depending on the context of the market, I’ll be aiming to buy near the lower band looking for a bounce back upwards, or sell near the upper band looking for prices to fall.

Like all indicators though, please remember it’s a tool. It’s not a complete system by itself.

Market context and price action analysis will tell you the market bias. Your job is to then take trades in the direction of that bias. Keltner channels can assist at this point.

In an uptrending environment, trade opportunity is found in the vicinity of pullbacks to the lower channel. In a downtrending environment, opportunity is found in pullbacks to the upper channel. And in a ranging environment, both may provide opportunity. Some examples follow below; remembering that it’s never as easy as it looks in hindsight.

Nothing magic – standard envelope or channel theory really. But if you’re not familiar with Keltner Channels then have a look at them and see if they have a place in your indicator toolbox.

Happy trading,

Lance Beggs

 

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My Biphasic Sleep Experiment

Life… the stuff that gets in the way of your trading!

I know that everyone has difficulty at times fitting their trading in and around the rest of their life. Especially if you’re still working a full-time job and raising kids at the same time.

But seriously, I can’t imagine a much worse time-zone for daytraders than the east coast of Australia.

With the best choice and opportunity available during the UK and US market hours, that means either trading in our evening or overnight.

The UK forex hours (8am-5pm GMT) are equivalent to my 6pm – 3am, the best part conflicting with family time (dinner, kids homework and never-ending trips to and from soccer training, keyboard lessons, guitar lessons etc etc etc).

The US emini hours (9:30am-4:15pm ET) are equivalent to my 12:30am – 7:15am. That’s a killer.

Not complaining, mind you. I wouldn’t ever trade this problem for a ‘normal’ job. And I accept their are some liquid markets in my normal daytime (SPI, HSI for example). I just haven’t found them to my liking. So, I accept it’s all my decision to live with this problem.

For a long time I just forced my trading onto my family. Trading time was my work time. They came second. This obviously was not a wise plan and I consider myself incredibly lucky to still have a family.

So now I place family first and select trading times that fit around other family responsibilities. Early UK market hours are only traded in small blocks of no greater than two hours, ONLY if family responsibilities allow me to trade at that time on that day, and ONLY if volatility is expected such as at the open or in the period immediately following a major news release. The bulk of my trading is therefore done once the kids are asleep, in either the forex UK/US overlap, or in the emini futures.

That’s the best solution I’ve found so far for still allowing family-time. The side-effect though is that it increases the amount of ‘night-shift’ trading leading to even greater danger of fatigue induced error.

I’m well aware of the dangers of fatigue, from my previous career as a pilot and aviation safety specialist. In fact, I’m the only trader that I know of who has a fatigue management plan (see this article for an intro to the concept: http://yourtradingcoach.com/trader/trader-fatigue-management/)

The 5/12 rule discussed in the above article is designed to ensure I minimize the likelihood of trade error due to acute fatigue. If I don’t meet the 5/12 rule requirements, I don’t trade.

Great in theory…

When it comes to putting it into practice though, I’ve seriously let myself down and often do trade with less sleep. It’s easy to rationalize at the time – life just doesn’t allow me to get that much sleep, say for example when I trade till 3am, get to sleep by 4 and have to be up at 8 to drop the kids to school.

End result – one very tired trader.

So, here’s my latest plan – a four week trial of a biphasic sleep routine.

A few definitions:

Monophasic sleep is how most people do it. One sleep phase per 24 hour period, usually a single block of around 8 hours +/- 2. Sounds awesome, but not possible for me.

Biphasic sleep involves two sleep phases per 24 hour period, often one longer one and a shorter one. I guess it’s like having a main sleep, plus a nap, just formalizing the nap period and ensuring it happens each day. Siesta time!

Polyphasic sleep involves greater than two sleep phases per 24 hour period. Say for example 5 hours awake and 1 asleep, repeated four times in 24 hours. That is perhaps a bit extreme for me right now.

I first came across this concept a couple of days ago, after discovering a press release from a University of California study (http://www.eurekalert.org/pub_releases/2010-02/uoc–amn021110.php) in which the findings “suggest that a biphasic sleep schedule not only refreshes the mind, but can make you smarter.”

I like that idea. I feel smarter already, just knowing what monophasic, biphasic and polyphasic mean.  🙂

Looking at further research on the net, and testimonies from others who have adopted this lifestyle, it appears that further benefits are an increased alertness, focus and the requirement for slightly less total sleep.

The downside appears to be increased feelings of fatigue for the first week or so of the trial (no different to status quo) plus the fact that sometimes life doesn’t allow us the opportunity to take our second sleep (some flexibility may be necessary, to adjust the schedule as required).

My wife already thinks I’m strange… so there’s no further downside in that department.

Ok, my plan…

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Climactic Reversals – Where is the Entry?

When discussing climactic reversals with newer traders, I find the most common question is where to enter.

After all, it can feel very much like the commonly quoted statements of ‘jumping in front of a train’ or ‘trying to catch a falling knife’.

Yesterday, (Thurs Feb 18, 2010) gave us a nice simple example, so I thought I’d share it with you.

 

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Avoid These Trading Days

Most forex traders know that when the markets are open during holidays the volume gets a little quiet. But how quiet? Without volume figures it’s not really possible to tell, is it?

To get an answer, why don’t we have a look at the fx currency futures, which do have volume and will give an accurate indication as to whether or not the reduction in volume is significant.

The following is a 30 minute chart of the British Pound currency futures over the last few days. I’ve set the chart to only display the UK session, 0800 GMT to 1700 GMT.

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Tick or Range Charts vs Time Based Charts – Example 2

While my analysis is usually conducted on time based charts, last week’s article discussed the one period of time when I always refer to tick or range based charts (usually monitoring both). If you missed it, you can read it here: http://yourtradingcoach.com/trading-process-and-strategy/tick-or-range-charts-vs-time-based-charts/

I’ve had a couple of requests for another example, with one request also for showing entry/exit points, so here’s one from this week’s market action. This time we’ll look at a with-trend example.

At 12:00pm (midday) GMT on Thursday, 4 Feb 10, we had the release of the MPC Rate Statement and Official Bank Rate. The following example trades the action following this news release. The news release is obvious on the first three charts due to the rapid expansion in volatility. It’s not so obvious on the range chart, so has been marked by a blue vertical line.

Trade entry (2 parts) is shown in blue. Exit (scaled out) is shown in magenta.

A little disclaimer first – trade execution was done through Interactive Brokers, not through Ninja, so the trade execution plots had to be created through a post-session replay. Part 1 is exactly as traded live, entry 1.5840, exit 1.5848. Part 2 orders were entered targeting 1.5860, but as sometimes occurs in one-click-trading the order was somehow inadvertently cancelled immediately after it was placed (I assume I must have somehow clicked on it a second time to cancel). By the time the initial confusion was over, confirming that the order was actually cancelled and I only had a one-part position in place, there was no opportunity to re-enter Part 2. Stuff happens! In the example though, I’ve chosen to show Part 2 anyway – makes me feel a little better and you get to see my original intent.

First, the five minute chart… not much use in getting a fast response following a news release:

 

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Trading Success – Predicting the Unpredictable

A very small percentage of people who unsubscribe from my email newsletter take the time to advise me of their reasons why. This effort on their part is very much appreciated, as it allows me to see in some cases where I need to focus future articles.

Last week, one of the unsubscribe emails contained the following single line reasoning: 

  • “I can’t predict the unpredictable”

 

Now, I must start with a disclaimer to the effect that I have not communicated with that person beyond their statement; it’s not appropriate considering the act of unsubscribing is in part a request for no more communications. As such, any of the following discussion in relation to their intent and meaning is based purely on speculation.

That being said, it does appear to be a common statement from those struggling to find their way in this game of trading.

“I can’t predict the unpredictable”.

There are a couple of problems with this statement.

Firstly, there is an underlying assumption that markets are unpredictable. While it’s understandable for a trader to form this conclusion having worked so hard to unlock the code of the markets with little success, it’s not entirely correct.

While it’s not possible to forecast future market action with 100% accuracy every time, it’s also not entirely random. Proper application of market analysis will allow you to identify market biases, which will provide you with an edge when combined with effective money and risk management.

As we discussed in the Rock, Paper, Scissors article, this game of trading is not so much about price, but rather about determining the future actions of other market participants. If we know their likely actions, we can position ourselves to profit from the resultant orderflow. Future actions of individual traders may be unknown, but with experience you’ll learn to identify places on the chart at which the masses are most likely to take action. In particular, at areas where they’re suffering drawdown and operating under extreme stress.

The main problem in the statement though is with the word ‘predict’

www.dictionary.com states that to PREDICT is usually to foretell with precision of calculation, knowledge, or shrewd inference from facts or experience.

While this implies a potential for error, I suspect that the reality is that most people are searching for certainty, rather than learning to deal in probabilities.

At a rational level, they know that this is a probabilities game. But at a deeper level, we do not operate well in an environment of probabilities – people crave certainty and will go to desperate lengths to find it.

Mark Douglas said it best in The Disciplined Trader

“Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt.”

In the market environment where certainty does not exist, these people will typically end up quitting out of frustration. Very few will persist to the point where they are finally forced to learn to operate in an uncertain environment.

It’s the difference between seeking certainty and managing probability and risk. Net long-term losers are typically seeking certainty in the markets. Net long-term winners have learnt to manage probabilities and risk.

So, if you’re trying to predict the unpredictable, stop it. You’re taking the wrong approach.

Identify a market bias; identify areas where order flow is likely to occur in the direction of the market bias; confirm the setup area provides a suitable risk:reward ratio and provides a technical place to put a stop which invalidates the trade premise, and then work the best entry you can within that area.

While at some level we are forecasting or predicting future market direction, we are in no way seeking certainty. We have simply identified opportunity and so act to take advantage of that opportunity, while managing risk in case this is one of our many losers. We can’t know in advance which of our trades will be winners and which will be losers. So, we accept either outcome, entering the trade and managing the risk.

It’s not about seeking certainty. It’s not about predicting the unpredictable. It’s about identifying opportunity and managing risk.

Lance Beggs