Piptopia Video #11
Today we did the best video ever. With Admiral Ackbar.
Click below to see the video. And other video watching options:
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Pip Value Spreadsheet
Click here for a link to a simple pip value spreadsheet that helps you calculate the value per pip to be traded if you are only risking 1% of your account per trade. For many of you, you already do this math in your head. The spreadsheet might make it a bit easier.
5 Questions with John Carter
After reading the book, I wrote to John and asked him 5 Questions. Here they are:
You mention on page 77 that you have observed that high frequency forex trader's don't last very long in the markets. Why do you think that is?
By high frequency trading I mean “lots of scalping.” I see this more in the stock index futures where it can work, but when the same strategies are applied to the forex markets the spread tends to eat into all of the profits. To clarify, this is for trades where people are trying to get in and out in less than 5 minutes. What I’ve seen work more consistently in the forex markets are moves off 60 and 120 minute charts that tend to last 30 minutes or more. Also, I think most people who are trying to scalp and do a ton of “little trades” get way too over worked psychologically and this works to their disadvantage. They can make money 10 times in a row but it’s the 11th one where they end up giving it all back and then some.
The book told about a trader who found it helpful in some cases to celebrate a losing trade, or shrugging off a winning trade. Why?
He found that people who did just the opposite tended to lose money – so he wanted to do what “they weren’t doing.” For a losing trade, he looks at is as a good thing because he is protecting his capital. For a winning trade, its not a big deal because his main focus still is on protecting his capital. The idea is by focusing on protecting the capital, the profits tend to take care of themselves.
What's your take on the increase in volatility lately? Has it changed your trading in any way?
As a trader I like the volatility but I have cut my position size in half and doubled the size of my stops so I can stay in the market “wiggles” while still risking the same dollar amount.
Is there one trade in your life that stands out as a major positive or negative experience?
The trade that stands out the most is one I made trading OEX options in the mid 90s. I had a $150,000 account. I had just bought a house and had agreed to a $30,000 down payment, which I would take out of my trading account. About 2 weeks before the closing I decided to “do a trade that would make me 30K” so I could keep the entire 150K in tact. I look at the charts that night and see that the markets are coming up to key resistance. If we can get up to that level the next day I decide I will buy puts.
The next day we get there and I buy 100 OEX puts at $8.00 ($80,000) or just over half my account. The markets chop around here for a bit then push higher. Now the options are priced at $7.00. What a deal! I go ahead and buy 100 more ($70,000) so now my entire account is in this position. The markets close near their highs, which is right near those resistance levels. My options are worth $7.50 so I’m “break even” on the trade as I go to bed. The next morning the markets gap up and never look back.
At this point I start thinking “well lets just let the gap fill and dump my options there for about breakeven.” The markets close near their highs on the day – and keep rallying for 4 days in a row. This was a monster rally. I’ve never really seen a rally since then. I finally can’t take it anymore and close out my position for about 75 cents. I lose $135,000 on the trade – not only wiping out my account but now the money for the down payment has evaporated. It was the “worst nightmare” scenario. I ended up getting advances on my credit cards so I could get the house. Then I spent the next 6 months trying to figure out why I let that happen. I cam across Mark Douglas’s book, “The Disciplined Trader” which I loved and also spent time sitting next to other successful traders. This who journey got me to my current trading philosophy which is setup and money management based instead of “profit” based. This made all the difference in the work for me in terms of consistency.
Your book is done. If you could add one thing to it, or one more piece of advice to traders, what would it be?
Besides the typos and things like that, I would add more emphasis on market internals for anyone trading stock index futures. The setups described in the book for stock indexes are not mechanical and depend entirely on the reading of the market internals (there is a chapter on market internals). I would also add in the concept of “anchor charts.” This means if you are trading off a 5 minute chart, use an “anchor chart” of say 15 minutes. If the 15 minute is bullish (positive moving averages crosses, etc) then on the 5 min chart I’m going to ignore short setups and focus only on the long setups in the direction of the 15 minute charts. This whole concept cuts down on choppy results.
Fibbles in Metatrader
A week ago or so, we did a webinar for FXCM and talked about channel trading and fib retracements of the inside of channels. Many of you asked for a way to draw these "fibbles," as they are called, in Metatrader.
Here is how to draw Fibonacci channels (with fibbles) in Metatrader:
1. Click Insert->Channels->Fibonacci
2. You can now choose which (fibonacci) levels you want by right clicking on the channel, choosing "fibo channel properties" and then choosing "fibo levels".
Thanks to Vincent for helping me remember how this is done.
If you find that you don't like the way this looks, or that MT doesn't do as good of a job as xtick does at producing these fibbles, then you might have to switch to xtick.
Bending the Trading Rules
A smart and inquisitive student wrote me today to ask why I sometimes seem to bend my own rules for indicator-based, discretionary trade setups. In response I wrote:
I think it's important to make sure you understand, not just hear me, when I say that the rules are guidelines. The charts are just 2D representations of a bunch of 1s and 0s flying around through internet lines -- millions of trades all combining to make the current price, every second of the day.
With all these bits and bytes flying around, we try to draw something on the charts to represent the world of currency trading. We call this drawing a "chart". And then we dream up systems to show us when to trade. And then, we start getting stuck on what the drawing says, rather than what our instinct is telling us based on past patterns.
When you study and follow one system, over and over again, for thousands of trades, you start to see something that isn't quite perfect from an aesthetic perspective. But it makes sense to you because it "looks good enough," or the market is going through a rough approximation of a pattern that you look for.
When I bend the rules on my charts in the rules or updates, it's because I am seeing something that is not fully or adequately represented by the 2D drawings of the 1s and 0s -- the charts -- that I can still "see". It comes with experience. It's bending the rules, of course, but a person earns the right to bend the rules when he or she is following something for years.
What To Do In Times Like These
Currencies all over the world have been more volatile this week than in any week in the last year, or two years, or three years. A 900 pip daily candle this week was a good sign that people were just simply freaking out.
If you stop and think for a moment, and I know you're the "stop and think" sort of person, you'll remember that right now the interest rate picture around the world looks like this:
Bank of Canada 4.50%
Bank of England 5.75%
European Central Bank 4%
Federal Reserve 5.25%
Swiss National Bank 2.5%
Reserve Bank of Australia 6.5%
Reserve Bank of New Zealand 8.25%
Now compare ANY of those numbers to:
Bank of Japan 0.5%
What's happening right now is that people are selling off high interest currencies and buying the world's lowest interest rate currency. Panic can only take this down so far; that's why this morning we saw the GBP/JPY rise 800 pips off its lows in just a matter of 6 hours. That's why we saw the EUR/JPY jump up 300 pips this morning in 3 hours.
At times like this there are pie in the sky traders who start believing that we'll see this sort of activity forever now, and a month from now they'll still be taking trades and hoping for 900 pip moves. Please keep in mind that this sort of movement is unusual, it won't last forever, and you shouldn't be altering your rules now to try to get rich quick.
In the near term, can expect more volatile movement up and down. We can expect a lot of uncertainty. We can also expect that we'll see disruption not just in the currency markets, but in all markets. So what do we do?
First of all, we never risk more than a small fraction of our account on a single trade. If you risk 1% or less per trade, and you stay true to your stops, none of this stuff matters. If, on the other hand, you start risking a lot, thinking that you are going to make a fortune in the short term, you are going to go broke. You will be, in other words, gambling.
Second, we're going to keep trading our system. Our rules don't change. Maybe the volatility increases. But soon enough people will get in touch with their senses, things will calm down, and we'll still be trading our rules, still be risking 1% or less per trade, and still happy.
FXCM Webinar
I did an FXCM Webinar yesterday and you can click here to watch it. And here's a link to the PDF / Presentation that I did.
Thanks to all at FXCM for hosting me. We hope to do this again very soon.
Dave on Euphoria
Dave writes:
Have you ever felt that your system was SOOOO FREAKIN COOL that you were invincible? And then you say something like this:
"You know what? I did it last time...now I am going to double up on my trade and double my earnings...I am going to knock it out of the park!"
What happens? You double up and then the market doesn't react the way you wanted it to. Suddenly this horrible flushing sound of your account going in the toilet rings in your ears - oh yeah...it sucks.
The problem is that we want to feel the dopamine rush that comes right before an anticipated trade and the sweet euphoria that comes afterwards. So we make any excuse to get it again. That is the inner stunt monkey. Get that monkey off your back. Stick to sound money management.
This is no different from when you have some losing trades. I don't know how many times people have told Rob and myself that they were feeling so bad about their trades that they missed the good ones. Well, that can happen when you make good trades too. You can get too euphoric and think that you can afford to just "knock it out of the park." Don't do it.
Here is what you should do.
1. Stay disciplined. Stick to the backtested plan or system If you don't you are going to get margin called - sorry. Go read Rob's ebook "The Miracle of Discipline". It will help you get back on track.
2. Backtest your strategy even more. It is not practice that makes perfect, it is perfect practice that makes perfect.
3. Take money out of your account as you become profitable, and protect your earnings.
4. Stay humble. Just remember...NOBODY can predict what market is going to do exactly. All you need to do is protect your account and follow your plan.
A Typical Day at Piptopia
Today we did a chart school Webinar for the training students all over the world. Here are some photos of the office, a power ranger riding on top of my microphone, of Jake the intern, of the students visiting the office this week, and the general good time that we have in full technicolor.
You can click on any image to make it larger.
Thanks to Ted B. for taking the photos.
Las Vegas Training: One Place Left
I had a student move from the Las Vegas training to the Miami training today. This opened up a spot in the Vegas training. If you are interested, let me know ASAP.
Piptopia Video #10
We're back with a video that, surprisingly, actually does answer some real questions.
Just kidding.
Is Pink the New Black?
Walter, a friend and trader, writes:
Did you know that immediately preceeding market downturns specifically, and in general, just bad economic times, the color pink becomes extremely fashionable?I noticed this in Australia in 2003 - all these guys in pink shirts.
I thought it was funny.
But it has only gotten worse. It is everywhere.
Didn't seem so bad in the states when I was over there, but noticeable (especially when you are looking for it, like I am - always).
Basically pink is a color that we are attracted to when we are in debt. It is a soothing color. Makes everything ok.
I remember wearing a pink tuxedo as a kid, as a young professional magician and then a few months later – Black Monday.
It turns out that throughout history pink experiences a great increase in popularity – and then the economic bad times come about…
I can't believe how leveraged people are now, scrambling to buy homes in Australia, and then going out and buying pink clothes with the second mortgage they have taken out on the home.
I can't help myself, but I love asking people in pink how many credit cards they have.
I wonder if it is a bad sign that the CFOs in the US are wearing pink ties?
Kathy Lien's New Blog
Kathy Lien, author of Day Trading the Currency Market, just launched a blog of her own. She'll surely be posting all kinds of good stuff over there, but here are two posts that I've liked so far:
Kathy's Trading Checklist (an an excel file to go along with it)
More Blogs than You Can Handle
Cool list of good forex blogs to read. If you like reading blogs about forex, and I think you probably do, then here's the place to go.
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