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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. ūüôā

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. ūüôā

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.

Categories
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√ā¬†[easyazon-link asin=”0470594594″]The Complete Trading Course[/easyazon-link] from Wiley√ā¬†at the author’s behest. Wiley is also my own√ā¬†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√ā¬†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 AfraidtoTrade.com and contributed to my New Trader FAQs book.

Perhaps a√ā¬†more accurate√ā¬†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.√ā¬†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√ā¬†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√ā¬†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.

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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.

Categories
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.

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Reader Questions Answered

What about the Forex Market?

Frequent emailer Rod is back with another worthwhile question.

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.

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Reader Questions Answered Trading Tips

Using Other Traders’ Mistakes to Improve Your Trading Performance

During the Swingers, Scalpers, Holders panel discussion I did with Currensee a little while back, fellow panelist Mike Baghdady discussed the idea of taking advantage of the mistakes made by other market participants to improve your trading performance. A question related to that came in which we didn’t have time to address at that point, but I will try to do so here.

It was:

Trying to capitalize on other trader’s mistakes seems risky since I presume it implies that we have to counter trend trade?

Actually, individual retail traders have a tendency to be counter-trend traders. That being the case, if you look to trade against them you will, in fact, be tending toward going with the bigger trend.

Having said that, keep in mind that the suggestion Mike gave was to capitalize on the “mistakes”. He did not make a blanket “be a contrarian trader” statement.

The sort of thing Mike was suggesting is to look for points where those trading in the opposite direction to where you would be looking are in a weak position. That means they are likely to be forced out of their position if the market works your way.

Let’s take a look at an example using EUR/USD.

On the chart below, at the blue arrow in mid-March there was a new high above the one three sessions prior, which also saw the market clear of highs from mid-February, and after the market had already broken the late-February/early-March consolidation area. In other words, it’s the type of move which could have attracted go-with long entries.

If you had reason to get short EUR/USD at some point after that break, perhaps when the market failed to hold the move, you could have been in a position to take advantage of other traders’ mistakes. There would have been many traders with stops to protect against the fake breakout. Some would have been close, and some would have been further back. Those stops being hit would have helped to accelerate the downside movement after the breakout was reversed.

On top of all that, we also know that if the market broke the early March low (green line), as it did, it would probably attract go-with shorts, helping to push the losses further, at least temporarily. That would give us an even better exit point.

And after that new lower low was put in, the whole reversal process started back up in the other direction. Those who sold the new lows became weak shorts once the market started moving back higher against their positions.

That’s an example of the sort of thing Mike was talking about, and something you may be able to apply to your own trading.

Categories
Trading Book Reviews

Book Review: Technical Analysis in the FX Markets

[easyazon-link asin=”0956400329″][/easyazon-link]Earlier this year I was asked by the editors at The Technical Analyst magazine if I’d be willing to contribute a “chapter” to a new book they were developing on the subject of technical analysis in the forex market. My chapter comprised of my answers to a series of questions they provided to me. It was joined up with contributions from a dozen others into the recently released book [easyazon-link asin=”0956400329″]Technical Analysis of the FX Markets[/easyazon-link]. (You may recall that I also had a chapter contribution to the [easyazon-link asin=”1934354023″]SFO Personal Investor Series: Psychology of Trading[/easyazon-link] book a couple years ago.)

I actually received a copy of the new book the other day. It’s a very nice hard copy edition. On the back cover it says:

Technical Analysis in the FX Markets comprises interviews with 13 market analysts from around the world. Each chapter provides essential and in-depth descriptions of techniques that are most effective in trading the global FX markets.

The group of contributors to this book is a pretty impressive lot. To a man (and woman in two cases) they are all professionally employed at the institutional level as analysts, strategists, or heads of research. I actually met one of them when I did my presentation in London back in May, and one of the others used to work the same group I’m in before moving on to a bank.

The big focus of the interview questions was to get at the specific ways each of us looks at and analyzes the forex market, obviously mainly from a technical perspective. Some of the questions asked are:

  • How does your application of technical analysis (TA) vary between time frames?
  • To what extent are the FX markets driven by sentiment?
  • Are there√ā¬†any indicators that work especially well in FX?
  • Are there any market conditions where TA works better?
  • What determines the “key levels” in the FX markets?
  • How can intermarket analysis and cross asset correlations be used effectively when analyzing currencies?

Naturally, the answers vary considerably from contributor to contributor.

My one little niggle about the book is how the charts are placed. They are not in-line with the text, so to speak. They are, instead, placed at the end of each section. For example, if you are reading my chapter and I mention something from a chart, you have to flip to the end of the chapter to see the figure, and the figure√ā¬†references are not always present. Bit of a pain.

Overall, this book represents a good insight into how professional market analysts, strategists, and trader go about analyzing and playing the forex√ā¬†market.

Make sure to check out all my trading book reviews.