Discussion of discretionary and mechanical trading including technical analysis and fundamental analysis
This week, the EURUSD had a very incredible move up to approx 1.4700, before falling back to approx 1.3900.
I was hoping that the Non-Commercials on the CFTC COT Reports would give the signal to go long. I was a little surprised at the reports.
Here is a partial output of the COT reports for this past Friday.
COT Reports
EURO FX - CHICAGO MERCANTILE EXCHANGE Code-099741
Commitments of Traders with Delta-adjusted Options and Futures Combined, December 16, 2008
——————————————————————————————————————-
: Total : Reportable Positions : Nonreportable
:—————————————————————————————- Positions
: Open : Non-Commercial : Commercial : Total :
: Interest : Long : Short : Spreading: Long : Short : Long : Short : Long : Short
——————————————————————————————————————-
: : (CONTRACTS OF EUR 125,000) :
: : :
All : 148,707: 29,443 37,218 20,665 55,116 55,557 105,223 113,439: 43,484 35,268
Old : 148,707: 29,443 37,218 20,665 55,116 55,557 105,223 113,439: 43,484 35,268
Other: 0: 0 0 0 0 0 0 0: 0 0
As you can see, there are still more non commercial (”smart money”) shorts than longs, however, it is important to note that the Non reportables (small speculators) are more long than short. The report is easier to read if you click on the COT Reports link above. There were some technical indicators that said to go long around the same time the non reportables went more long than short. Again, I only use the COT reports for long term trades in conjunction with other technical indicators.
The EUR/USD made a very impressive bullish move this past week for the first time in a while (1 week move). The EURUSD moved up over 600 pips this week. Technically, the Euro does appear to be bullish, but the question is for how long. Or is this just a retracement? For my longer term positions, I use the weekly CFTC Commitments of Traders report to help guide my trades. I don’t follow them exclusively, however, I do use them as a bias to see what the large speculators are doing. If you want to see something interesting, look through the historical data at the CFTC and see how the EURUSD compares to what the Non-Commercials have been doing for the last 10 years.
http://www.cftc.gov/marketreports/commitmentsoftraders/cot_historical.html
To find the EURO, open up “Long Format” under Chicago Mercantile Exchange Futures-and-Options Combined. If you scroll down EURO FX, you will see that there are more Shorts than Longs for the Non-Commercials (Large speculators - some might call “The Smart Money”). However, for the Nonreportable positions (small speculators), there are more longs than shorts.
For me personally, on my longer term trades where I use daily and weekly charts, I usually like to see the Non-Commercials be more long than short. However, this isn’t a clear cut rule of thumb. YOu’ll need to do your own backtesting. Since there are currently more shorts than longs, I will personally wait a little while longer for there to be more longs than shorts before making any changes to my longer term positions (much smaller position sizes). Again, I only use it as a bias and use other technical indicators to help me get in and out of positions.
Before you start trading the COT reports, I highly recommend reading as much as you can about it. There are some things that you have to know before using these reports. For example, when reading the EURO, this works for the EUR/USD since the USD is on the right. However, for the Swiss Franc, the information isn’t as straightforward since the USD is on the left - USD/CHF.
It is also important to mention that the COT reports are released every Friday, but the information uses the previous Tuesday’s contract info. Therefore, it is 3 days late by the time EVERYONE gets it. It is released the same time for everyone.
I recommend starting the following articles before attempting to trade using the COT reports:
http://www.investopedia.com/articles/forex/05/COTreport.asp?viewed=1
http://www.babypips.com/school/how_to_use_the_cot_report.html
I also recommend searching google for “trading COT reports” to read more articles.
In future posts, I’ll discuss in more detail how I use the COT data to help make trading decisions.
Today, I will discuss criteria that I used in choosing Forex brokers. There are literallly hundreds of Forex brokers to choose from, so how did I narrow the list down? First of all, when choosing a Forex broker, I am in the US, so I narrowed it down to US brokers to start with since I preferred that they are CFTC (Commodity Futures Trading Commission) registered and a member of the NFA. Note: not all US Forex brokers are registered with the CFTC and NFA. If they are registered, this still doesn’t guarantee you that you wont lose your money, but it is an extra layer of protection in the wild world of Forex. If something goes wrong, at least there is someone you can call and have hope. Again, currently, as far as I know, not all Forex dealers are registered with the CFTC and NFA. I know of at least one big broker that isn’t.
I would start with the list that is published regularly by the CFTC:
http://www.cftc.gov/marketreports/financialdataforfcms/index.htm
Start with some of these brokers. I personally narrowed down the list using their Net Capital criteria. There are a lot of good brokers who are meeting the current net capital requirements, however, personally, I chose to go with brokers with net capital above $20 million. This doesn’t mean you shouldn’t consider those that are above $10 million. I know of a few in the $10-$20 million range who are very popular and seem like good brokers based on some research and discussions with other traders. But, you need to be familar with the NFA Net Capital requirements.
After reviewing the net capital requirements and generating a list, I would next research their disciplinary history or see what complaints have been filed against them as well as the outcome of the complaints.
Once you have your list narrowed down, I would do some searching at some popular Forex Forums such as ForexFactory.com and BabyPips.com. Search their forums for the broker(s) and see what people are saying. Keep in mind that it is likely that you will see negative complaints regarding ALL brokers. You need to keep things in perspective. If you were to go by what people are saying, you would never choose any Forex broker. I have yet to find one broker (popular broker) that doesn’t have any negative comments. Sometimes, people have the tendency to blame the broker when they lose their money when they had a stop loss that was too tight. Some complaints seem legitimate though if there are enough different people talking about the same thing. For example, broker connectivity issues. It’s always interesting to see what people are saying. Keep in mind that some of the good comments could be from people writing who work for the broker. You don’t know who’s writing what. And on the other hand, it’s possible that a competitor is writing about another broker. Ok, I think I’m making it sound as if this tip is worthless. 
I still think it’s worth seeing what people are saying. I found out some useful information regarding one broker that I almost went with. I got some information in a forum, and then called the broker to confirm if it was true or not.
Once you have the list narrowed down, I would start by downloading their platform and trying it out. It needs to have all of the features that you need plus what you might need in the future. For example, if you plan to do automated trading at some point in the future, you’ll need to research if it is possible to do with the broker and if so, what does it cost or is it free?
Some other things to check:
1) Check to make sure that they have all of the currency pairs that you want to trade.
2) Make sure their swap rates (rollover rates) are reasonable to you. When do they charge/pay swap?
3) Do they have any policies against your trading style? For example, some brokers wont allow you to do scalping.
4) What is their customer service like? Call them to see if they answer - especially off hours.
5) Do they offer mini and micro accounts?
6) Read through their “Application Agreements” to make sure they are reasonable to you.
7) What is the Withdrawl policy?
8)What are their spreads? Do the spreads change during high volatility or during news announcements?
9) Are there commissions? Most brokers don’t have commissions, but some do.
10) What leverage is available?
11) Do you need to place trades on a PDA or Blackberry? If so, is it possible with their platform?
These are just some of the things that should be considered.
I chose a couple brokers for diversification. I only did a partial funding, and then did a test withdrawl to see how easy the process was and how long it took. I got pretty lucky and was able to get my funds by the next day, so this part was easy.
One of my biggest concerns with Forex brokers is that they don’t go out of business and shut their doors. It can be very difficult to get your money back - if ever. You’ll want to choose a broker very carefully.
The NFA has also put out a very nice PDF document called Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know. http://www.nfa.futures.org/investor/forex/forex.pdf This document is well worth reading.
I’ll add more tips in future posts.
I have evaluated and used several platforms for automated trading including TradeStation, NinjaTrader, MetaTrader, and RightEdge Systems. I’d like to share my opinion regarding these. Probably the most popular out there is TradeStation. I primarily used TradeStation to automate my Forex strategies. I also used it to trade the S&P E-mini, but that system wasn’t automated. Writing programming code to automate a system on TradeStation is much easier than other platforms. TradeStation uses a language called EasyLanguage. I used to program in Pascal years ago, and the syntax is very similar. TradeStation does a good job by trying to make things as easy as possible for development and backtesting. One huge advantage of this platform is that you can actually call and get live help. If you post on their Tech Support Forums, you’re likely to get quick results. Most likely your question has already been asked, so you can just search. The disadvantage to TradeStation is that it costs more than the other systems that I used. Although you can usually find a special deal to get a month or two free, it was costing me $100 a month to use it afterwards. Plus, you have to pay for your data feeds with the exception of Forex. With Forex, not only do they charge you the spread, but they also charge you a commission. Most brokers charge the spread only.
NinjaTrader will allow you to use their platform for free to develop and test your strategies as long as you’d like. However, once you want to go live, you have to pay. At the time, it’s about half the monthly cost of TradeStation. NinjaTrader is slightly more difficult to program in since it uses C#. However, they do have a GUI that will allow you develop your strategies without any coding. Unfortunately, not everything can be done through their GUI - but quite a bit can. NinjaTrader also has a support Forum with very quick replies to questions. However, there is no tech support line that you can call for questions. I guess this is how they keep their costs down. I’ve also used the NinjaTrader platform to trade discreationary systems. The platform is worth checking out.
Unlike TradeStation and NinjaTrader, MetaTrader is used for Forex only, and it is 100% free for development and for live trades. It is a very popular platform for Forex users and you can find quite a few Expert Advisors and Indicators for free on the Internet. You can of course program your own, but the language is a little more difficult than TradeStation - MetaTrader is basically C++. I currently use MetaTrader for automating Forex systems.
RightEdge Systems is similar to NinjaTrader and is also around the same cost. It is definitely worth checking out.
If you want to get started with automation, you can find online help for TradeStation, NinjaTrader, and MetaTrader for free. There’s quite a bit out there. I will post some links in a future post.
After learning the functionality and syntax of each system, I bought a very good book that had some great strategies. One of them I still use to this day with some minor modifications.
The book is called Building Winning Trading Systems with TradeStation. Although this book was written for TradeStation, they describe the strategies in enough detail that you can convert the pseudocode to other platforms for back testing and forward testing. If you already have TradeStation, they give you a CD with the code that you can use to load and test within minutes.
1) Before trading with real money, wait until you have a system or strategy that you’ve backtested and forwarded tested successfully. If you are trading without a system/strategy, you are just gambling. I’ll show you examples of systems/strategies in future posts. Yes, this is easier to do with an automated system, however, it is also possible to backtest discretionary systems/strategies. It just takes a little longer. Remember this: It is not ok to blow up your first account.
2) Once you “think” you have a strategy, trade with a small fraction of what you have. Trade very small. Forward testing with papermoney is different than forward testing with real money in my opinion. It’s a psychological thing. If you are successful with a small amount of money for a few months, then try adding a little more. If you aren’t successful, then go back to step 1 and refine your strategy or come up with a new one.
3) Do not believe everything everything you read on the Internet. For example, people selling “strategies”. Most people selling systems/strategies are making more money by selling the system than with the system. These systems need to be backtested, but more importantly forward tested. Some sites do have forward testing results. I’ll talk about these later. I’ll also discuss why you have to be very cautious of backtesting results.
4) Don’t believe all the talking heads on TV. For everyone saying go long, there’s another saying go short. Try to listen to both sides if you insist on watching.
5) Don’t believe everything you hear at a seminar. Be careful of paying anything or buying anything during a seminar. Do as much research outside of the seminar as possible.
6) If you insist on trading Forex or Futures, be very cautious. The leverage available can wipe you out real quick if you don’t have proper money management or a proper strategy. There’s a lot of advantages of trading Forex, but there’s a lot of disadvantages as well. Yes, it’s possible to make money with it, but without a proven system, you could easily lose it all. Money management is the key to trading everything, especially Forex and Futures. The leverage available in Forex wipes out most traders.
I’ll continue to add more things to consider in future posts.
SPY as of 11-28-2008 close
The image above is the SPY (S&P 500) as of the 11-28-2008 close. As you can see the stock market has had a very nice rebound since hitting a fairly recent new bottom 1 week ago on Friday. The market has had very strong rally. It may appear that the market has hit “the” bottom, however, some of the biggest and most powerful market rallies are during bear markets. The market has a way of sucking people in just before spitting them out again. It could be time to go long, but I don’t trust it. I am going to wait and see if it bounces off the trendline I drew above. If it breaks above it to the long side, I still recommend to proceed with caution. Volume was also very light today - which was very expected since it’s the day after Thanksgiving. Nothing has really changed for the better fundamentally as well. Next week, we’ll also have some very important economic announcements that will need to be watched carefully.
In future posts, I’ll show you how I would trade this set up using Options. I need to establish a base with some more postings before I start going into strategies.
I originally started trading using discretionary techniques which include a combination of technical and fundamental analysis. It took me a while, but I eventually discovered that in order to be successful at trading, you need to have a system that you can backtest and of course forward test. You can do this using discretionary techniques, however, one may argue that it is better to do it through mechanical systems trading. Each have their pros and cons. I personally think there is a place for both, and I actually do both, but most of my trades are discretionary.
I’ll start the discussion of automated trading or mechanical trading in this post. Automated systems take a long time to develop, but once written, they can be backtested fairly quickly in comparison to discretionary trading. Within minutes, you can backtest years worth of data and see your equity curve line to see if it’s profitable. Efficient backtesting is a huge advantage. One of the biggest advantages of automated trading is that you can remove your emotions from your trades. Most traders lose due to greed and/or fear. If you can eliminate these, this can be a huge advantage.
Some of the disadvantages of automated trading include: 1) coming up with a set of rules that will work and then learning how to code these into the particular platform language that you are using, 2) things can go wrong with the system that you didn’t account for or never considered, 3) there’s no way to know if what worked in the past will continue to work in the future - was enough backtesting performed?, and 3) was the backtesting curve fitted?
Tomorrow, I will continue the discussion and also talk about some of the automated trading platforms that I used.
I finally decided to start a blog to share my ideas, experiences, successes, failures, and strategies with all aspects of trading that I’ve experienced including Forex, stocks/equities, equity options, Forex options, and futures trading. Here is a little background regarding me:
I have about 7 years of experience trading. At this time, I mostly trade Options, equities, and Forex. I’ve traded discretionary using technical and fundamental analysis, and I’ve also traded mechanical systems using a wide range of platforms including TradeStation, NinjaTrader, RightEdge, and more recently MetaTrader. I also traded using arbitrage strategies at one time until the opportunities eventually disappeared. How did I learn to trade? I’ve read and reread between 40-50 books on trading ranging from Profiting with Forex toTechnical Analysis in the Financial Markets to Triangular Arbitrage in the Foreign Exchange Market to McMillan on Options. I will discuss some of my favorite and most useful books in future posts. I’ve also attended numerous free options courses, attended trading classes at a community college, as well as paid for expensive Forex Training. However, I primarily learned to trade through lots of practice.
Throughout all of this, I found some strategies that have worked and of course more that didn’t work. The funny thing is that my core system wasn’t discussed in any book that I’ve read or in any training - it is something that I discovered through years of hard work. Yes, I will share the strategy in a future post.
