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Deep Posts Reader Questions Answered

How come you don’t just start trading full time?

How come you don’t just start trading full time? Wouldn’t it be more lucrative then working the day job?

This is a question I get from time to time. Actually, on occassion I’m accused of not trading for a living, as if that’s some kind of trading blaspemy.

Guess what? Most traders do not trade for a living or full-time or anything like that. A lot of folks may have aspirations to do so, but it’s a relatively small fraction who actually do so – and no, that isn’t necessarily an indication of success. There have been plenty of full-time traders who have had to go back to real jobs, believe me.

For my part, I’ve never had any desire to trade for a living. My interests are numerous and varied. While I definitely enjoy being in the market, I prefer to do my trading part-time. What’s more, I tend to see my best trading performance away from short-term timeframes. On top of that, my job is as a market analytst. I’m good at it, it pays me well, and there’s basically no risk of actually losing money. Plus, I get access to information and resources that I wouldn’t necessarily have otherwise.

So that’s my position on the subject. I encourage you to share yours as well.

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Deep Posts Reader Questions Answered

Where can I get intraday forex data?

Here’s another question (or rather pair of questions) about forex data.

I am in need of some advice of FX data feeds.

1) I am looking for a free or cheap real time forex data feed I can use for my analytics. I don’t care how far back it goes, it simply needs to be real time. What do you suggest?

2) Historical intra-day forex data. Back to ’99 for the Eur/Usd and greater for other majors. What do you suggest?

Real-time data in any market often comes with a fair cost, though if you’re not classified as a professional it’s usually considerably cheaper. Forex is generally a bit different, though, given the lack of a central exchange (and thus data source). In the currency market the data is generally either strictly a broker feed or some kind of aggregate of them.

The cheapest way to get a live feed is most likely going to be through a broker. A lot of them have APIs or DDE functionality. Some charge, some don’t.

As for historical intraday data, Duksacopy (I think I spelled that right) used to offer free intraday data. Not sure if they still do or not. There are loads of other sources out there, though most charge for it. Just do a Google search and you’ll find many of them.

Be very cautious here, though. Data from one source may not match data from another, and in a meaningful fashion. I once did some back-testing using intraday data, but when I went to apply the system in question on a real-time basis the results were different. It ended up that the volatility of the data in the historical series didn’t match the volatility in my broker’s actual pricing. The historical period ranges (hourly) were in some cases considerably wider than those my broker had quoted.

In other words, I would not have been able to trade the prices my system was tested on. That’s a HUGE problem, and one any system tester needs to account for in their analysis. The optimal solution is to use data from the same broker with which the trading will be done to ensure consistency.

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Deep Posts Reader Questions Answered

Do you manage money?

A reader by the name of Mike asked me the other day whether I manage money. The answer to that question is no. I’ve always been a bit reluctant to go that route for the simple reason that if I have sub-par performance on my own money it’s only me who suffers. If I do that managing other people’s money then I’d feel bad for letting them down as well.

You might suggest that’s sounds like a confidence issue. I’d say that’s it’s more about being realistic. Even the best money manager can take a hit. I’m not so arrogant as to believe nothing could ever happen to cause less than desirable returns.

Also, people get a bit crazy when it comes to their money. I’m not sure I want to deal with investors challenging me on my trade decisions, risk taking, performance, and all that. It’s kind of like having parents questioning line-up selections and playing time when their child plays on a team. They don’t generally have an appropriate perspective on things.

But this is mainly a moot point anyway. I work for a Registered Investment Advisor firm. That would make things very complicated when it comes to managing money and stuff like that. It’s tricky even to just express and opinion on things.

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Deep Posts Reader Questions Answered

Where should Fibonacci Lines be drawn from?

Here is one of the more detailed and specific trader questions I’ve gotten in a while.

John,

Here’s a question I’ve been trying to find an answer to for a while now…

I am a short term futures trader using primarily support and resistance levels to trade breakouts using stops and targets based on

1.5 to 2 times the 19 period average of ATR. I trade using three time

frames: a 125 min chart, a 25 min chart and a 5 min chart. Once I’ve identified the overall trend and a possible trade, I use a 15 min Point and Figure chart to filter out the strongest support and resistance areas (the box sizes obviously vary depending on the contract, e.g. 2×3 for the ES, or .0010×3 for the currency contracts,

etc…)

I have had some success using Fibonacci Retracement Lines to help filter out more effective levels. What I am having trouble discerning is where the Fibonacci Lines “should” start and end. Should they be on the 125 min chart, the 25 min chart or the 5 min chart? If they’re on the 5 min chart should they be from the high to low of the previous day, previous 2 days or previous 5 days?

Any help with this questions would be greatly appreciated.

Thank you for a great blog, I always look forward to your posts.

Happy trading,

Dom
NYC

It’s very interesting to hear someone talking about definitely non-standard charting timeframes. Not too many folks go with 125 and 25 minute bars. The 19 periods used for the Average True Range (ATR) is also a non-standard one (14 days is the common default). I’m all for looking at things in non-standard ways. That allows a trader to more closely match an indicator to the timeframe the trader is operating in, not just the one the indicator’s developer used. Obviously, though, considerable testing is required to get to the right settings and to understand the ins and outs of the indicator with the new setting.

In terms of the Fibonacci retracements, I’m not a major user in my own trading. They are something which occassionally get worked in to my analytic writing, however, so I’m not unfamiliar with them or their application.

The response I would offer regards to the questions asked are firstly to use the chart timeframe which best applies to the timeframe of the timeframe of the trade in question. For example, if you’re trades are based on the 5 minute chart then that’s the timeframe of chart the Fibos should be drawn on. Using ones from a longer-term chart may provide an interest reference point, but generally have less immediate relevence for the shorter-term timeframe.

As for where to draw them, Fibo lines are generally derived from meaningful high and low points. That doesn’t mean a specific bar. It means the latest high and low which bracket the last significant directional move in the timeframe being reviewed. For example, if you’re looking at the daily S&P 500 chart, then the first level Fibonacci retracement lines you draw should probably be based on the August high and hte October low.

But I’m not a Fibo expert, so others may say something different.

The last comment I would leave Dom with is that at least on the face of it his approach seems extremely complex – potentially more so than necessary. If I were working directly with him on his trading I would probably have him take a look at whether he could simplify things.

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Deep Posts Trader Resources

Something to check out: StockTwits

Howard Lindzon, a hedge fund manager, has been involved in developing a new project called StockTwits. To quote the site information:

StockTwits is an open, community-powered investment idea and information service. You can think of it as Bloomberg for the little guy and gal. Eavesdrop on what traders and investors are talking about RIGHT NOW or contribute to the conversation and build your reputation and following as a savvy market wizard.

The site is based on the Twitter micro-blog engine, grabbing the posts by users related to stocks.

Give it a look.

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Deep Posts Trading Tips

Backtesting isn’t just about evaluating a trading system

Trading via technical analysis is mainly an effort in pattern recognition. Evaluating the price action on a chart is pattern recognition. Using oscillator type indicators such as Stochastics are about pattern recognition. Even working with simple moving average crossover methods are pattern recongition efforts. In all cases it’s about seeing something which is showing up now and extrapolating from that a forward looking expectation.

Of course, before we can develop those expectations we have to be able to identify the patterns.

When we initially learn a chart pattern or an indicator, part of that education is naturally going to include some basic rules of thumb for pattern recognition and application thereof. Here’s the problem, though. While the patterns may appear in a consistant way – such as RSI rising above 70 – the implications of them are rarely the same twice.

Here’s an example. Keeping with RSI, a reading over 70 is generally the point at which one starts to think of the market as being in overbought territory. Trading for a reversal based on that reading, however, only makes sense in a primarily range-bound market. In a strong trend, however, it’s definitely not a good idea to do that. It’s a question of understanding the tool – knowing the patterns.

Here’s the thing, though. Real pattern recognition can only come from experience (and knowing in detail how the indicator is calculated, if using one). That means getting deep into things – spending a lot of time watching price movement and how the patterns develop – is a must. Much of this will come from real-time application, of course, but things can be accelerated by back-testing.

By back-testing here I’m not really talking about system evalution. I’m using the term to describe a process by which you go back and walk through the historical data as if you were trading using the methodology (indicator, chart pattern, etc.) in question. This means some grunt work, though. You have to really do a period-by-period walk-through, not some automated run. It’s about you learning to see the patterns, not about your computer performing some pre-programmed action.

I’m not going to say doing this type of back-testing is the same as having live experience. It’s not. What it can do is move you well down the path toward mastery, though. One of the major issues which leads to new trader failure is that they never spend enough time with a method to really understand it and to learn the patterns by which it can be successfully employeed. They instead bounce from one to another, always looking for the easy solution. There are none. Get your hands dirty. 🙂

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Deep Posts Reader Questions Answered

Why were you in that trade?

I want to ask a question of those who are trading the S&P futures. Since the audience of this blog is primarily smaller traders, I guess it would be more correct to say the mini S&P futures. I want to hear about how you’ve been trading the last couple of weeks because I have seen some really amazing actions among the smaller traders in that market.

Let me explain.

I have posted previously on the Commitment of Traders Report, which shows the positioning of the three primary types of futures market participants (Large and Small Speculators and Commercials). It’s a report I look at each week for my job.

Something really amazing showed up in the most recent data from last Tuesday. In a market where there’s been a very strong, very clear downside bias the Small Speculators as a group not only cut their shorts, they added to their longs. In September they had begun lightening up on their longs (they’ve been net long for over a year), paring back to 59% long from 68% long. Then they started building again at the end of the month, back up to 62% long as of September 30th.

As of last Tuesday, a day when the market closed basically on the day’s lows, those same Small Specs were out to 76% long as the result of nearly cutting their shorts in half and adding more than 10% in additional new longs. This blows my mind.

So here’s my question: If you were long the mini S&P at the end of the day on Tuesday of last week (10/7), why? I really want to hear the things that were justifications for being so.

I hope I get a bunch of responses here. This isn’t about embarrassing anyone. I want this to be an educational opportunity. My suspicion is there are two major reasons for being long at that point – 1) the “it can’t go any lower” justification, 2) expectation that government action would turn the market higher.

Please, though, share your thoughts with the group.