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.

Reader Questions Answered The Basics

System Back-Testing and Indicative Forex Data

Frequent emailer and commenter Rod sent me another good question yesterday, on the subject of trading system back-testing.

I want to backtest a strategy on some forex pairs. The timeframe would be 1 day, so I would be using EOD data. In this situation, how bad of a mistake, if at all, is it to rely on indicative data? If my forex broker cannot provide a historical database, what options do I have for a reliable test?

The difference between forex data and that provided by exchanges is an important one which a lot of folks don’t really appreciate. Exchange data is most traded price, meaning where actual transactions took place. Spot forex data is indicative price, which is the bid and/or offer where transactions could have taken place (but also may not have done).

Contrary to what Rod fears, using indicative prices is actually more realistic than using traded price. Why? Because you can be more accurate with where your fills would be. You don’t have to leave room for slippage they way you do testing something like stocks or futures where you don’t necessarily know what the bid/ask is. You know the price you could sell at (bid) and the price you could buy at (offer) – or at least one side of that with the ability to fairly easily determine the other in most cases.

The issue, however, is what data source you use. Ideally you want to be testing using the prices from the broker through whom you’ll be trading. This may not be as big a deal for EOD type trading, but for intraday trading the little variances between the prices of different sources could make a big difference.

Reader Questions Answered Trading Tips

Forex Volume Figures

I had a question come in overnight regarding volume data and how it can be used for forex in terms of the price distribution methodology I use and teach. The question was:

In connection with your price distribution course, how do you find the volume figures needed for this type of analysis in forex?

I hear some use the futures as proxy but dont COT reports only come once a week?

Of course in forex trading volume is always an issue since there is no one aggregate source for spot trading figures. Futures volume can be employed as a proxy so long as you understand the limitations and can make the price level adjustments to make sure you’ve got the correct reference points. That volume will be available in any commonly available futures price feed service just as it would be for the S&P futures or gold or oil.

As for COT (Commitment of Traders), that won’t help you at all in this regard. As I’ve written before (Commitment of Traders – A Weekly Report Worth Viewing and Do you use the Commitment of Traders report to trade?), it’s got some potentially useful info for the wider perspective, but it won’t help you on a day-to-day basis.

Reader Questions Answered

Where can I find this forex data?

A reader by the name of Tom submitted the following question about forex and related market data.  

Hi John

Big Fan of your work. I hope you dont mind if I ask this question as I am still relatively new
at trading the fx markets.

I was wondering where would be a good source of market data. Im looking specifically for the interest yields for the treasuries of different countries (Euro, GBP, Japan, Aus etc) in order to analyze and trade their currency as forward rates can be used as an approx to central bank moves.

I am also looking for data on the fx futures market particularly the open interest.

My broker provides a report on this sort of thing yet I am not too comfortable solely relying on them for my analysis.

I’ve tried looking at however their interface isnt exactly user friendly. I was wondering if you would know any free sites that chart this data?

Many thanks

There are loads of sources for market data on fx futures. It just depends on whether you want a feed or just to look at a chart or a figure. If it’s the latter, a really good site is FutureSource. The site has loads of futures information, including both quotes and charts. Back in the day I used to actually trade the market intraday off those free charts (it’s delayed data, but I didn’t need real-time pricing for my purposes).

There is, of course, also the weekly Commitment of Traders Report. That’s released weekly by the CFTC, and includes a breakdown of positioning by the different types of forex futures market participants.

As for global interest rate data, I’ll admit that Bloomberg is generally the first place I go when I want to look them up – which really isn’t that often. The Financial Times site has some of that information. There’s also stuff on the Wall Street Journal site. The Interest Calculator on the Oanda FXTrade site might be useful.

Hopefully that helps. I encourage others who know of additional resources to leave a link in a comment.

The Basics

Understanding Open Interest in Futures and Options Trading

One of the less well understood statistics in the basic daily trading data set is open interest. It’s a statistic that is generally included in end-of-day price quotes along with volume, but a lot of traders tend to ignore it, potentially to their detriment.

Open interest is the total number of open contracts in futures and options trading. Recall that in derivatives markets like futures and options there must always be matching longs and shorts. For every mini S&P 500 futures contract that I am long, there is a short out there somewhere, and vice versa.

Let’s look at it in very basic terms with a simple two trader market.

Trader A goes long 10 contracts, with Trader B taking the short side. That increases open interest by 10 contracts.

Trader A later offsets 3 of those longs, and by extension Trader B offsets 3 of his shorts, to push the open interest down by 3 contracts to 7.

Open interest, therefore tells us how many active open positions there are in the market at the end of each trading day. It rises and falls on a daily basis as traders continuously enter and exit positions. Generally speaking, it is presented as an aggregate figure for all active contracts, though especially in options you can see the contract-by-contract figures as well.

The value of the open interest data (as Bill Rempel and I were discussing yesterday – Warning Sign: Open Interest Declining) is in its ability to highlight whether traders are building positions (more participation) or taking them off (less participation), especially when combined with volume data and a look at the weekly Commitment of Traders report. The latter shows a breakdown of the positions of the three primary sets of traders.

Reader Questions Answered

The Timing of Data Releases

A question which recently came up had to do with getting data releases. A trader looking to trade the news noticed action in the market ahead of the major data releases thought that maybe some folks were getting the data earlier than others. On that basis he asked:

Is there some way to get these releases earlier?

To first address the timing of data releases, the news events of primary interest to traders are the economic data releases and such. Those things are provided to the news organizations ahead of time by the issuing institutions, but embargoed until the official release time. No one would dare release the data early as it could very easily cost them access to the release all together.

As to action ahead of time, since the data isn’t available to anyone outside the embargoed news groups, basically what you’re talking about is traders gambling on what’s coming. It happens more regularly than strikes me as being reasonable. I mean a trader can get really nailed if they’re in the wrong direction when a release comes out. Granted, it’s also possible to make a lot of money too. It really is just gambling, though.

Trader Resources

Commitment of Traders – A Weekly Report Worth Viewing

One of the more interesting tools I use in my work is the weekly Commitment of Traders (COT) report. To quote the Commodity Futures Trading Commission (CFTC) definition:

The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for market reports in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Basically, the COT breaks down the positions of the three major types of futures (and futures options) position holders – Commercials, Large Speculators, and Small Speculators. Each weekly report shows the total number of contracts long, short, and spread for all of the traded contracts for all markets.

Commercials are generally producers. For example, agricultural producers and miners would be in the this category as they are the producers of commodity products. The focus of this group’s futures market participation is on hedging.

Large Speculators or Professional Traders are hedge funds, banks, and other institutional traders with a focus on speculative profits. These folks tend to trade in large size. This is generally considered the “smart money”.

Small Speculators are normally small individual traders. Since the trading public is normally seen as being wrong most of the time, the position of these traders can be viewed as a contrary indicator.

For my day job I focus on the stock indices. It’s interesting (and useful) to see how the positions of the different groups change with market events (like Small Specs piling in to longs through the FOMC meeting while Commercials were getting flat). I also sometimes look at what’s happening in the fixed income, currency, and other futures market. It’s a good way to see where buying and selling pressures could come from in the future.

Weekly COT reports (and historical reports) can be found on the CFTC website. Another resource for the information (free and paid content) is