The Essentials of Trading

Information and resources to learn about trading and the markets

An Inquiry for Active Forex Traders

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I need to do a some research for my employer. If you’re an active forex trader, I would like to ask you for a little bit of help with that research. I just need answers to a few questions. Feel free to answer directly using the comment form below. Alternately, you can submit your answers by email to author (at) theessentialsoftrading.com.

The first question is really part of the quick survey:

What broker do you use?

Now here are the real questions:

1) What short-term trading resources do you use in your trading? By this I mean information and data sources and other tools you use to stay up on market events and make your trading decisions.

2) What short-term trading resources or info do you not currently have access to, but would like.

3) What format(s) of information distribution do you prefer – text, audio, video, live chat, etc.

Your input is most appreciated.

 

Keeping things simple in your trading

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Beanieville posted Don’t Let All Those Technical Analysis Gurus Confuse You on Tuesday with the primary suggestion being that one should keep things simple by avoiding derivatives and leverage, and a secondary one to keep your analysis relatively simple. The title obviously only applies to that second point, but I think the general message that less complexity is better for most traders is a good one.

In particular, there’s a quote that goes:

“If you’ve been to some options or futures trading sites most of you probably feel like you don’t belong because of all apparently sophisticated analysis of the market, with so many trendlines and so many indicators you never heard of.”

I’m going to agree with the part about all the lines and indicators all over charts. I see it all the time, even among my professional colleagues. If that’s what works for them, fine, but I’m definitely not a fan. The charts I look at are simple, without all kinds of trendlines, Fibonacci retracement levels, Elliott Wave counts, oscilators and all that. To me the rest of it is clutter which serves no other purpose than to distract and obscure the important part – what prices are doing.

Now, having said that, the idea that options and futures traders are the main culprits here is just plain wrong. I’ve seen stock traders with some of the most intense charts ever. Market complexity does not necessarily equate to analysis complexity. It’s a personal thing for each individual trader. I’ll leave it to them to decide what’s best for them in the end.

The other contention made by Beanieville is that traders should avoid options and futures and leverage (which I presume would include forex as well). I’m mixed in this one.

On the one side, I’ve answered a lot of questions about leverage and margin from confused traders. For many folks it would be best to stick to simpler markets at first, until they have a solid grasp of things from that perspective before taking on leveraged trading.

That said, there are plenty of folks who quickly grasp futures and options and such. I have no problem with them starting in the perceived deep end of the pool, as long as they have a healthy appreciation for the risk side of the equation.

The bottom line for me is that different people are going to be best suited to trade different instruments. Keeping them from trading in that fashion virtually guarantess they perform below their potential.

Trading with Fibonacci methods

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I received an email yesterday asking about trading with Fibonaccis. While I’m familiar with fibos, they are not something I myself use. As such, I’m not comfortable entering into a discussion of them myself. Instead, I’ll offer up some potentially useful alternate sources on the subject. Here’ they are.

Fibonacci Retracements

Five Fibonacci Tricks

Trading with Fibonacci

Using Fibonacci Levels to Find Support/Resistance

Fibonacci Trading Techniques

These are just a few examples, of course. I don’t have any connections with the sites in question, so I can’t comment on those who run them.

If you have any suggests, definitely leave a comment with your views.

Should I use charting software, and if so which one?

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It appears that the trend in trader questions landing in my inbox these days is to ask questions in multiple parts. Another one came in over the weekend from a trader who prefaced his questions by saying

I have been trading(training) for one year now, hard work does pay off…I took a 15 hour in class forex course a year ago and since then I have been practicing, doing homework every single day, trying to understand everything and I am at the level where I know what I am doing, (99.99%)  I am taking forex very seriously and it is my long term career.  I have all of my strategies worked out and just started to trade last month along with my own trading system which I am implementing B4 placing an order.

The first question this intrepid new(ish) trader had for me was whether I would recommend using charting software, and if so which one would I suggest.

To answer the first part of the inquiry I’m going to say it depends. There are a great many free charting resources out there. Most brokers (forex and otherwise) these days have one through their platforms. Some are certainly better than others. My recommendation is that if your broker has what you need in terms of functionality and time frame, then I see no reason why you need to spend money on some other charting software, and the price data to feed it.

For my part, I’m a bit mixed. Some of what I do is readily available through most broker charting packages. There are things, however, which are not. That’s stuff like custom indicators (I do some studies on volatility) and system testing. Also, some forex brokers in particular don’t offer charts in longer time frames, like weekly and monthly. For that reason, I do use paid charting.

In terms of a good general charting package my preferred one is MetaStock. I’ve been using it for over a decade now. The charts are nice. I can do all sorts of things with custom indicators. I can also do loads of systems testing. It’s very handy. (Full Disclosure: I currently am employed by Thomson Reuters, of which MetaStock is part. I, however, came from the Thomson side into the merger and had been a paid user of the charting package since the 90s.)

The other package I use regularly is Sierra Chart. In particular, I do my price distribution analysis with this package (employing the TPO charts). There’s also a really nice play-back feature that I’ve used a couple of times in the videos I have produced. The one thing I would say is that when looking for a source of price distribution charts I found other packages which had what I thought were nicer presentations, but since I was only using that one feature I didn’t see a justification of the much higher price tags.

Taking a Look at Price Distribution Charts

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Have you seen a chart like this before? (click to enlarge)

This style of chart is known my a number of different terms. Market Profile is one. TPO charting is another. Volume at price is a third. Although they are becoming more prevalent, I’d venture to say that most traders haven’t looked at charts like these before.

The idea of these charts is to identify where the market is spending the most (and least) amount of time. Think of it like taking a bar chart and squeezing all the bars together. That gives you a distribution of prices over the course of a day or week or whatever. (The chart above shows two seperate days).

Two very good books on the subject of what I often refer to as “price distribution charting” are Mind Over Markets and Markets in Profile, both by Jim Dalton.

This charting methodology is the basis for a great deal of what I do in my work as a market analyst, and I went over the methology in the Following the Quest for Value course I developed earlier this year. I definitely encourage you to give a look. It could very well change the whole way you think about the markets and the way prices move.

Which indicators and timeframe can be best used for scalping?

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This question came in from a forex trader named Calvin.

I am currently trading forex and wish to embark on scalping.  Which are the indicators and timeframe (1 min, 5 mins) that can be best used for scalping.

I don’t personally scalp, and never have. That much focus on the price action just isn’t something I could ever do, nor would I want to try. I’ve had related experiences as an analysts. It’s not something I consider much fun or very interesting.

That said, scalping is about positions which having holding periods measured in minutes – if that. Which chart one uses will depend on how long one is willing to stay in a trade (scalpers aren’t all made the same). The longer that is the long the bars (and don’t think one couldn’t necessarily scalp off a 30 minute or longer chart). If you really want to be in and out very quickly, then you’ll use the 1m charts.

Really, though, the bottom line is picking the one which provides you the best opportunities based on the way you’re going to trade.

As for indicators, my point of view is the best indicator is the one that works for you – or not using them at all, which is my own personal preference. RSI works for some people, but not for others. The same with Stochastics and moving averages and CCI and every other indicator out there. Indicators are nothing more than filters. Pick the filter you like the best and learn how it works and how to apply it.

Leading Indicators vs. Lagging Indicators

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A question came up recently on the Trade2Win forum about what indicators are leading and what are lagging. This isn’t the first time a discussion on that subject has come about, so I thought it would be worth taking a bit of time to expound upon here too.

By definition, any indicator which uses historical data is a lagging indicator. A moving average is a lagging indicator. Stochastics and RSI and Bollinger Bands and just about any other technical indicator you can think of are lagging because they primarily rely on historical data. The larger the look-back period, the longer the lag – meaning a 10 day moving average has a larger lag than a 5 day one. 

On top of that, some indicators introduce a lag on top of a lag. The MACD indicator is a perfect example of that. It’s uses a moving average of the difference between two moving averages.

Lag aside, however, the idea is that we’re looking for tools which allow us to develop a probablistic view of the future, which you could call a leading indication, I guess. If you can use an inherently lagging indicator like RSI, or a chart pattern, to create a statistical trading edge then they are leading indicators as far as you are concerned, and that’s all that really matters.