Separate trading and life

Separate trading and life 20^th

     The markets don't care how your day has been. Moreover I'm sure everyone doesn't care much how the markets have been, except your trading buddies.
     Like I explained in my previous post people make up the market and humans are instinctively selfish animals. So if you are angry because you lost money on a trade or because your boss gave you a hard time at work, the person on the other end of the market isn't going to lose their own money to make you happy. If somebody on the other side of the market begged you to close your position at a loss because they are having a bad day, would you do it?
     On the entirely opposite side of the spectrum people outside of the trading world probably don’t care what has been going on. It’s essentially like any other hobby or niche. If a car guy was talking to you about his ’66 vette or that Formula 1 race that went the previous week you would probably give little concern unless you are into that sort of thing. Trading is a very boring business the only interesting thing is the money making possibility. Basic morals and etiquette say one should not flaunt one’s wealth. Therefore, speaking about trading without the impact of money is a contradiction. The two ideas exist hand in hand and therefore talking about trading is unmoral and goes against basic etiquette.

     Moral of the post, keep work issues at work and home issues at home, it will clear your head and improve your trading performance and it will make your personal and home life much more enjoyable. Thanks for reading and happy trading.

Changes and a new trade

Hey everyone, just wanted to write a short post. Posts will be uploaded every Tuesday instead of Thursday because getting the newsletter, these posts and school work done is pretty hectic so Tuesdays work much better for me. Also, I've realised that I've been right on the direction of the market but not the timing. Those who follow would've seen my bullishness, and the fx market has rallied pretty strongly over the past weeks however my conservativeness has kept me out for all of it. So now I'm just gonna bite the possibility of losses and start buying some 'risky' currencies. It's better to be early and lose  some money than late and not have made any at all. I'll do a proper write up for the trades later because I have TOK essays to write due tomorrow. Hello coffee!

People Make the World Go 'Round and Move the Markets

Why psychology? Why not?

   Why don't I just develop some crazy god like indicator that predicts the market 100%? Well, not only is that impossible but it’s a waste of time simply because the market cannot be predicted. Let’s examine that statement. 

   The assumption made by technical market gurus is that they can predict market movements 100% of the time or whatever bogus claims they make. But they are predicting markets based on price, or a derivative of price (indicators). But then price moves because of buyers buying at a certain time and sellers selling at a certain time. But buyers and sellers make their trades for various in-explainable reasons. So they really are trying to predict the most illogical element in the market... people.

   Fact is it doesn't matter if god himself came down on earth and every indicator in the world said buy shares in Company A. If no one buys any shares the stock won't move. So my assumption is, “Wouldn’t it be better to trade the source rather than the derivative?” Why trade indicators if you profit or lose based on price, why analyze price if you can analyze the people.

So my logic is trade based on what you expect the masses to do. Perfect example, I had some shares of Google in a demo account going into earnings. I knew I’d get a pop and I sold it all. Mark my words Google will hit $580-575 over the next two weeks and I still haven’t read the report or the conference call. That’s how all these growth stocks trade.

   The only problem is it’s not like I can go to every trader and investor and ask what their positions are. So until I get that small glitch out the way I’ll share my system with you all. Until then thanks for reading and happy trading.

The Psychology behind my Methodology

I stated in one my previous posts some of my rules in my trading methodology. They go as follows:

First: The trend is your friend. Find where is price going in the long term and never trade against it.

Second: Trade within your means: Never over trade or risk more than your account can handle.

Third: Never get into a trade you don't understand.

Now what I wanted to do here is explain the psychological reasoning behind each of the rules. The reason for each of these rules is to eliminate the human emotions or cognitive bias in our own trading but to also predict and profit from other person's emotions and cognitive biases. 

The main biases we want to avoid are:

Confirmation Bias & Semmelweis Reflex

Focusing 

Irrational Escalation

Post Purchase Rationalization

Wishful Thinking

The Trend is your Friend

Trading the trend doesn't have a significant effect on individual psychology. However, it is very useful in order to profit off of the band wagon effect. "Hey, that gold just keeps going up we should get in." Common example where being in a position ahead of the band wagon is an easy way to make money in the markets. 

Trade Within Your Means

This rule deals with wishful thinking. Many times traders, new and old, enter a position with insane amounts of leverage. In other words this rule deals with money management. If you can't handle the loss financially or emotionally don't put it on. You might as well burn the cash.

Never Get into a Trade You Don't Understand

This rules deals with all the other biases. Let me explain with an example. Some analyst writes an article on Apple (AAPL)and you like what he has to say. So you go and buy some Apple shares not understanding why. First thing that you do is reassure yourself that you've made the right decision, you are going through "Post Purchase Rationalization". So now you want some hard evidence supporting your position "Confirmation Bias" and your reject all the negative information "Semmelweis Reflex". So you now only focus on the good news "Focusing" until a terrible report is released that Apple is failing but you ignore it even though it is clearly is against your position "Irrational Escalation". Morale of the story don't enter if you don't have a plan or any background knowledge on the position. You may miss an opportunity maybe you may see a sell off as a buying opportunity if you did your homework. 

Thanks for reading and stay tuned for more trading advice, info and explanations and don't forget to visit my other website.

EUR/USD short *Updated

Hope everybody had a great weekend. I know I did, since school has been off since Wednesday :). But its Sunday and that means the start of the fx traders week, so lets get to it.

I've been bearish on the euro for quite a while now and I've found it very profitable to short euro's on any sort of rally. Also in this risk adverse climate i want to short it against a stronger or more stable currency in this case I'm looking at the USD. 

Levels

Entry: 1.3500 (s) (LE)

Stop: 1.3550 

Target: 1.2500 

Reason

Technical: 

Entry based on the 50% Fibonacci Retracement 

Enrty could easily be moved to the 62% level at 1.3530

Fundamental: 

• Continued headline risk in Europe as well as a widening recession which has started in the periphery and has begun to enter the stronger nations. 
• Resolutions on the table involve looser monetary policy and/or a round or printing euros.
• Should there be a default there will be a sharp down turn in this currency pair.

Notes

I like the risk reward on this trade and with all the headline risk any let up will most likely be followed by another fall. My only concern with this trade is that the order doesn't get filled. We'll see what happens.

________________________________________________

Update 10/8/11

Result of Trade
Gross P&L: $6.31
Roll: $0.00
Net P&L: $6.31

Final Comments: Trade went pretty well, I had the opportunity to watch it during one of my classes and just saw it tank 70pips in 5 or so minutes. So as to not be greedy I just took my money and ran. Position is closed and no further orders open for this pair so I've "forgotten" it already and I am just looking forward to the next attractive trade.

Forgot the Fundies and The "account"

   The battle between technical and fundamental analysis has been going on for years with no clear winner. For my trading I use both simply because the more information the better, failing to prepare is preparing to fail.
   How I use fundamentals is a little more complex. I have developed an index system similar to the USD index for all the major currencies and use news releases to estimate the move in the market and compare it to the actual move and trade around the miss pricing.
   For example let's say American CPI (inflation) came out lower by 1% this may imply a 100pip move in the market for the dollar. Also Japanese Trade balance improved by 1% this implies a 100pip move in the market for the yen. Therefore we should see the USD/JPY decline by 200pips. However, let's say the market only declined 100pips, we can assume that the market has miss priced the USD/JPY by 100pips.
   Trading around this is simple though. In the case above we would expect a 100pip decline over the course of the next week and look for signs of a reversal to buy or look to get ahead of the decline and go short.  I'll post the Index data every week so you can better understand my trades.

   As for the actual demo account, I will be using excel to track account information using the actual position statements from fxcm. Those will be posted here as well. The reason for the this is because fxcm doesn't offer a $1000 demo account and I don't actually have $1000 to throw at one of these ventures.
Rules:
1. All Trades will be posted here with explanations.
2. $50 will be added to the "account" at the start of every month.
3. All results will be posted here as well as my performance results every month, quarter and year.

Thank you for reading and don't forget to follow this blog, my other blog and comment below.

My Methodology

Alright, time to get down to business...
Before we go any further I think it's important that I layout the basics of my method. I'm not however, trying to preach a "holy grail" system, I'm only laying out my system to help you better understand my thoughts going forward and learn, if possible, from example.
First and foremost my system is based around price action swing trading, from now on I'll refer to price action as PA. PA also known as tape reading, is based analyzing how, where and price moves. This includes studying candle sticks, support and resistance and rarely any other indicators. Ok so let me give an example:

Above is a 15 minute chart of the Australian dollar against the US dollar.

The two grey lines represent support and resistance lines, there is also pivot points and the ADX indicator. 

As a PA trader ill first notice the support line (bottom grey line). It can be seen that this acts as support because price has visited and reversed from this area twice. Same with the resistance line price has visited and reversed twice. Also we can see that the ADX<25 so we can therefore conclude that the AUD/USD is stuck in a range. Now candle stick analysis also sheds light on the strength of these levels as the long wicks at the resistance line and long tails at the support line shows that the market is rejecting these levels. 

Ok, so analysis done how would I trade this? Buy at the support on a reversal signal and confirmation candle with a stop 20-50pips away with a limit at the resistance line. It's as simple as that. 

Now that you know how I analyze, I'll layout my basic fundamental rules and speak to them in future posts.

First: The trend is your friend. Find where is price going in the long term and never trade against it.

Second: Trade within your means: Never over trade or risk more than your account can handle.

Third: Never get into a trade you don't understand.

Finally: Market Sentiment>Technical and Fundamental Analysis.