Trader Resources

My Tools of the Trade

Trader Mike and Blain at StockToGo both posted recently on the various tools they use in their trading. I know I’ve talked about this before, but I figured it was worth revisiting the subject. Seeing as I work for one of the biggest information companies in the world (Thomson Reuters), I have access to all kinds of stuff. The jealousy factor among my peers is quite high. 🙂

At Work
For my daily work as a forex analyst I have four monitors running from one CPU. One of displays Thomson One, with which I keep track of the equity markets. Another screen has Reuters 3000 Xtra (haven’t updated yet to Eikon). That’s my primary data and news workhorse application. I’m mainly a technician, but I cannot ignore the fundamental side of things as I have to write about that as well. On a 3rd screen I have a version of MetaStock Professional to use some custom indicators, run the occasional screener or test, etc. My fourth monitor is my working screen, of course.

Among the other tools of my trade during the work day are Reuters Messenger (we’ve got Compliance limits on what IM apps we can use) for quick contact with colleagues and contacts, Feedly to keep track of a long list of blogs and news sites, and SnagIt for grabbing and editing charts and other graphics. All of our content creation and editing is web-based, for which I generally use Firefox. I also use Excel a fair bit, in many cases bringing data in (live and/or EOD) from Reuters or MetaStock (which is really the same data), either as a drag-and-drop or through a special plug-in. Seeing as I have a very geeky research-oriented side, Having access to all this data is very cool. 🙂

My own trading
In my work I have to follow the markets in real time and know what’s going on across the board all the time. For my own trading my needs are much, much less. In fact, I can generally get all the information I need from free and/or low cost sources, and I don’t need anything special on the computing side beyond a relatively modern machine and a high speed internet connection.

I have always done my stock and option trading with Charles Schwab (I may think about changing that this year), and have had plenty of access to information, screeners, and all the stuff I use in my equity market trading through their website and other tools. My other primary trading focus is forex, and for that I use Oanda’s fx Trade platform. The commonly expressed complaint about the Oanda platform is the lack of charting tools, but it’s got more than enough for my purposes as I don’t really need much more than a price chart. The one drawback for me is the lack of chart time frames above daily.

There are only three data/charting packages I have ever paid to use. One is Daily Graphs. Readers of The Essentials of Trading will know that I have long had the CANSLIM system as the underlying philosophy of my stock trading. I can get much of the same info through my broker, but using the Daily Graphs service can make the process quicker and more efficient.

I have also paid for MetaStock and Sierra Chart with IQ Feed data. Seeing as I work for the parent company of MetaStock now, I get the software and data free these days. I first started using it back in the middle 90s, however, and paid for the software and EOD data (didn’t need intraday, and still really don’t) for more than a decade as something to back-up the free charting I was getting through my broker accounts and to work on research ideas. In the case of Sierra Chart, it was strictly about price distribution charting (Market Profile/TPO). Sierra Chart is very reasonably priced and has some other nice features, like a replay function.

Beyond that, I’m probably pretty boring. I use Excel a great deal for performance tracking, data analysis and research. My knowledge of and experience with VBA makes it a powerful tool for me. That’s about it, though. I tend toward swing/position trading time frames, so I don’t need a lot of the decision-support help day trading can require.

Trading Book Reviews

Book Review: The Complete Trading Course

[easyazon-link asin=”0470594594″][/easyazon-link]By way of full disclosure, I received a free copy of Corey Rosenbloom’s new book [easyazon-link asin=”0470594594″]The Complete Trading Course[/easyazon-link] from Wiley at the author’s behest. Wiley is also my own publisher and Corey is a personal contact of mine. Oh, and he also lists me in the acknowledgements to the book. That was more for sharing my perspective as an author and commiserating on things than for any direct contribution to the text, however. This is the first time I’ve actually seen the book, so this review is coming from the perspective of a fresh impression. Corey, by the way, is an active blogger at and contributed to my New Trader FAQs book.

Perhaps a more accurate title for this book would have been The Complete Technical Trading Course. That is what we’re talking about here – a front-to-back approach to applying technical analysis to trading. This is not, however, a survey book that attempts to walk the reader through all the various sorts of technical methods and techniques. The author, instead, focuses on the tools he actually uses in his own market analysis and trading.

The book starts off talking about trends, both in terms of defining them and in terms of identifying them. It then progresses into the subject of momentum, and that is followed by a chapter focused on market phases. All of this lays the groundwork for the second part of the book where it gets into strategies and tools. These include candlestick charting, price pattern analysis, Fibonaccis, and Elliott Wave techniques. The final section of the book focuses on trade set-ups and strategy execution.

It should be noted that this is NOT a trading system book. It’s about analyzing the markets and identifying good set-ups. If you’re looking for something mechanical you’ll want to look elsewhere. Also, the author is very much a stock market oriented trader, and that is reflected in the text. This doesn’t mean the methods and concepts are not applicable to other markets, however.

Overall, I’d say this is the exact sort of book I’d recommend to those readers of The Essentials of Trading who were interested in seeing how technical analysis can be applied in trading. It’s well structured and loaded with examples. I have a personal pet peeve with the standard internal formatting of Wiley Trading books, but that’s not the fault of the author and it doesn’t really detract from the message or lessons. Oh, and the bibliography is huge!

Bottom line: If you want a nitty gritty detail-oriented book on how to apply technical analysis techniques and methods, [easyazon-link asin=”0470594594″]The Complete Trading Course[/easyazon-link] fits the bill quite nicely.

Make sure to check out all my trading book reviews.

Trading Book Reviews

Book Review: Harmonic Trading, Volume One

[easyazon-link asin=”0137051506″][/easyazon-link] [easyazon-link asin=”0137051506″]Harmonic Trading, Volume One[/easyazon-link] by Scott Carney is a book I was given the opportunity of picking up for free. It looked interesting, and a bit different from others I’ve read and reviewed, so I took the opportunity to get a copy and give it a look.

The underlying subject matter of the book is Fibonacci based technical analysis and trading. As such, it is a highly mathematical approach which utilizes ratios and retracements and projections. It shares considerable similarities to Gann Theory and Elliott Wave approaches, so those with at least a passing understanding of either will have no problem following the discussion.

As much as there is an annoying arrogance to the author’s writing, he does present a pretty comprehensive market analysis and trading approach in this book. Specific patterns of importance are described with numerous chart examples. That makes for a fairly easy read. Entry and exit strategies are outlined. Carney even talks about the mental side of trading.

I personally don’t go in for this approach to analysis and trading, but I know folks who have used similar techniques successfully for many years, so I won’t dismiss them. As with anything other method, it’s a question of matching up personality and trading style. If a mathematical, pattern-oriented approach is appealing to you, then Harmonic Trading, Volume One is probably a book worth picking up.

Make sure to check out all my trading book reviews.

Trading Tips

Looking at Random Trading

Every once in a while, the topic of random trading comes up. Normally, it’s part of a discussion about whether you could go long or short based on a coin toss and trade profitably because of a good exit and money management strategy. Let’s take a look and see if there’s any truth to that assertion by running some tests on EUR/USD daily data going back to when the euro was launched in 1999.

Random in, Random out
As a base line, I’m going to start with a totally random system – one which uses a coin toss to get into a trade and a coin toss as to whether to exit an existing position. The rules are very simple. Start with the coin toss to figure out long/short at the end of the first day’s trading. At the end of Day 2, we do a coin toss to see if we’re going to stay in the position we put on Day 1, or close it out. If we stay, we do the coin toss again the next day. If we exit, we start the process over at the end of that next day (so if we exit on Day 2, we do a coin toss as to whether to get long or short at the end of Day 3).

I ran 1000 tests on the data set to get enough information to make a reasonable conclusion. The results were pretty predictable. On average, the test resulted in a 26 pip loss, which is basically the same as being flat over more than 10 years of data. The standard deviation was 3668 pips, giving you an idea of how wide the distribution of results was over the 1000 test sample.

Random in, Strategy Out
The totally random system didn’t cut it, so let’s look at a random entry system that has a non-random set of rules for exit. I used the same coin toss entry as noted above, but for the exit I tested a reverse break approach. Specifically, the rule was that longs would be exited if the current day’s close was lower than the close from N days prior, and shorts would be exited on a close higher than the one from N days prior. I tested a range of look-back periods of 1 to 10 days. Here’s what it produced.

What the chart shows is the average result (the tick on the bar) and the range containing results one standard deviation above and below the average. So in the first bar we’re looking at an exit strategy which says get out of a position if today’s close is lower/higher (if we’re long/short) than yesterday’s. The average outcome was a loss of 3602 pips, with a standard deviation of 1846 pips. That means the 1-day test was a losing one in all or nearly all cases, and by a pretty sizable amount, generally speaking.

It is clear from this data that a random entry system can be profitable, though. We need look no further than the middle of the chart to see the performance of the longer look-back periods. The 6-day look-back provided the best result with a 5446 pip average gain and a 1236 pip standard deviation. Eyeballing the 1000 sample test results, I don’t see any negatives among them.

Maybe we’re looking at things backwards
Looking at these numbers, it’s hard not to think that maybe traders need to look at things the opposite way around from how they usually do – to think about exit first, rather than the entry. OK, I’m not really suggesting that we all just start trading random entry systems, but it certainly does provide fodder for further testing and analysis. We can use random entries to test the performance of different exit strategies. One caveat there, though. You have to make sure when you do something like that that you’re getting the same entries for each different exit approach, otherwise the results won’t be comparable.

Trading Book Reviews

Book Review: Trading Realities by Jeff Augen

[easyazon-link asin=”0137070098″][/easyazon-link]I recently finished reading [easyazon-link asin=”0137070098″]Trading Realities[/easyazon-link] by Jeff Augen. The book was made available to be for free (via Amazon) and I opted to give it a look because it sounded like it was written for new traders. Obviously, the area of new trader education is one I have a lot of interest in. That being the case, I thought it made a lot of sense to check this book out to see if it was worth recommending.

Unfortunately, this isn’t one I’m putting on my recommended list.

I’m not entirely sure what the point of this book was. I think it was to present option trading as a better path for trading the stock market than actually trading the stocks themselves, but I can’t be positive. The author does do a pretty good job of laying out some option strategies that could be used along with or in place of holding stocks, and I definitely agree that for many people they present a better path (I for one have been trading options rather than stocks for quite a few years). That’s just one chapter out of seven, though.

Unclear focus aside, I have a few major issues with the book.

First, there are things he says in the book which are flat out incorrect. One of them is very early on and very obvious for anyone familiar with the currency market. He suggests that during the major dollar weakness a few years ago the Yen reached a value of $1.15. The fact of the matter is that the Yen has never been worth more than about $0.0125 – that one and a quarter cents. This isn’t a horrible error, and doesn’t alter the context of what he’s saying at that point in the text, but it does trigger a credibility warning flags.

A much bigger error, especially coming from someone claiming expertise in options, comes when he talks about price change distributions – an important element in volatility measurement and option pricing. He makes the statement “These values fit a bell-shaped curve where the peak represents a small number of unusually large price changes.” This is totally incorrect. The peak of a bell curve represents a very high frequency of small price changes. I thought maybe he’d just misspoke, but in the same paragraph the author goes on to talk about how the large price spike in Amazon was the peak of the bell curve of that stock’s price change distribution. Anyone who’s ever studied basic statistics would know that to be completely backwards. This definitely challenges his credibility.

Oh, and he talks about price changes in terms of them fitting a standard normal distribution, which has been well documented as being incorrect. Real price change distributions in the market have fatter “tails”, which mean higher probabilities of large price moves than a normal distribution would suggest.

My second issue with the book was the extreme cynicism that dominated most of the first half of the text. The author basically goes off on a rant about things like the impact of high frequency trading, how investors who think they can do a better job picking stocks are fooling themselves, and how the government is lying to us through the statistics it publishes. There are talking points in there, to be sure, but the one example of erroneous stats he show is hardly proof of anything.

Another issue I have is the amount of ex post facto market analysis the author does in the text. At points it’s little more than a history lesson. Sure, there’s always value in going back and reviewing things, but isolated examples of how one should have interpreted developments doesn’t really give the reader a lot they can use moving forward – especially since, according to the author, the individual cannot hope to beat the institutions anyway.

But wait! In the latter half of the book the author lays out directionally based options strategies which imply the trader/investor is looking for the market to move a certain way and can get it right. He also talks late in the book about how modern technology allows individuals to identify inefficiencies in the market, even though he spent pages earlier talking about how the market is efficient and how individuals cannot hope to compete on the technology side with the institutions. In other words, there’s a fair bit of contradiction.

The author has other books on option trading which might be better choices. Needless to say, I’d skip this one.

Make sure to check out all my trading book reviews.

Trader Resources Trading News

The Best Forex Market Analysis in the World!

Yesterday, at the FX Week awards event in London, the forex market analysis product I work on within the IFR Markets group at Thomson Reuters was presented with the coveted Best Vendor for FX Research and Strategy award for 2010. Basically, that means we do a better job than any other 3rd party provider (non-bank, non-broker, non-dealer, etc.) of providing insightful and useful market commentary, analysis, and trading strategy according to the voting of users.

We’re #1! We’re #1! We’re #1! 🙂

While most of our customers come from the institutional trading world (banks, hedge funds, etc.), our content is also available for free to retail forex traders through Oanda, FXDD, dbFX, and FXCM (to a limited degree). If you broker isn’t on this list, tell them you want IFR Markets. IFR Markets forex coverage is also available to members of the Currensee community through that platform.

Here’s the release:

IFR Markets wins prestigious industry award for FX commentary

IFR Markets, the real-time markets commentary service of Thomson Reuters, has won a prestigious FX Week Award for its agenda-setting coverage of the foreign exchange market through a year of great turmoil.

IFR Markets Forex Watch won the Best Vendor for FX Research and Strategy, 2010 award, which is decided by votes from the foreign exchange industry and recognizes the expertise, commitment and flair of the editorial team.

The team consistently provided incisive commentary and winning trade ideas through a stormy year for currency markets that included a yuan revaluation and Japanese intervention, a euro crisis, multiple dollar slides and a surge in emerging currencies. They faced stiff competition from players such as Informa Global Markets and 4Cast who value this accolade above all others.

IFR Markets Forex Watch is a commentary service run by analysts in London, New York, Boston, Sydney, Tokyo and Singapore who cover majors and emerging FX around the world, around the clock. Packed with flow and order information, technical trading strategies, options flow and volatility data and regional/country focus reports, Forex Watch complements Reuters News and Reuters Dealing, giving Thomson Reuters customers a complete offering in the foreign exchange space.

Trading Tips

Don’t Be Like This Trader

A reader of the market analysis service I work for emailed me after I posted a comment about GBP/USD. He started with this:

So I just read your posting about the GBP/USD on my fxdd headline. You mention that the upside is pretty limited above 1.55 and that a possible retracement might occur. Do you think it will drop back to the 1.5300 range in the next couple of days?

When I get emails like this from retail traders (I don’t normally get them from institutional readers) alarm bells go off. Is this guy in a position and wants to know what to do?

After I responded that my comment was intended for that afternoon’s trading only and that I wasn’t really comfortable with the idea of the market returning to 1.53 soon, he responded with this:

Hmm…earlier this morning an ACM analyst came out and said that there’s sellers around the 1.5470 area since 1.5490 is a strong resistance but pair continued passed 1.5500.  I asked about the 1.5300 area b/c I have a short @ 1.5350 and contemplating on what to do here.  How far down do you think the pair will retrace this afternoon?  I might just close the position around 1.5420 area.  Any suggestion?

Short you say? 🙂

The market was up around 1.55 when he sent this too me, having started to back down from highs around 1.5520. I told him I couldn’t provide specific advice, but that I didn’t think GBP/USD would get much below 1.5480 if it did in fact kept falling through the afternoon (low ended up being about 1.5465 as the day was winding down). I don’t know if he got out

If he didn’t close out the position yesterday he maybe could have gotten out closer to even early in European trading today (chart above is in GMT time), but still at a loss from his short entry. If he was hoping for further losses to get back to break-even (or better) he’s been out of luck given the snap back.

The moral to this story is that if you’re asking someone else what you should do with a position you’re in you’ve got a big problem. Your plan of action for every trade should include a specific exit strategy, and you have to stick to that strategy.