April Fool’s – Navigating the Sovereign Debt Storm

Last month (April) was one of the most challenging months of trading for me in a while. Unfortunately, it took me most of last month and part of this month to figure out that I had to re-tool my approach in order for it to start working again. The grueling experienced last month was due to the bad timing – my decision to get aggressive with trading in April and the unfortunate change of market behavior getting weird…

Discipline Revisited – Don’t Be Fooled

There’s a difference between having the discipline to stick to your trading plan and having an unbiased perspective to see the market clearly. Though related, they each require different parts of your attention to master…

Price Action Trading – Around the News

As traders, one of the most exciting and dangerous periods of trading is when news events (i.e. economic data releases) occur.

Unexpected events like those due to geo-political events or natural disasters are the type of event-risk one just has to suck-up and deal with if and when it happens. Event risk though that is expected like those associated with economic data releases can be managed by preparedness. Even though you have no idea how the market will react to news regardless if the news comes out as expected or not, you will be prepared with the knowledge that the market could get very weird just before and after the news is released. How should one approach these types of days?

Playing the Trading Game With Discipline

Trading is the most engaging and challenging activity I do that actually pays me to play. The second most engaging/challenging activity I enjoy is paintball. But a very close third activity I enjoy (and relevant for this post’s purpose) is playing Texas Hold’em Poker.

My cousin and fellow rounder, the one and only “T”, had the usual conversation…discussing poker, trading and what each of us was doing to become better at each one respectively. Of course, the conversation always leads to how similar the attributes needed to do well at one are directly applicable to doing well at the other. And this of course shouldn’t come as any surprise since both activities involve putting money at risk and pitting your skills against the skills of other “players” – with trading this means other traders.

A very good read that hits on many of these similarities (and for the most part I agree with the article) can be found at WallStCheatSheet.com here.

The attributes that I think are the hardest for most people to master is discipline. Once you have the framework of your trading approach (ie. entries, exits, money management, risk capital, etc.) in place, you need to have the discipline to carry out the plan with solid emotional control so that you can succeed and do well at it. Any lapse in judgement or with one’s emotions (read about a recent lapse I had in a previous post, “A Lesson in Sicking With the Plan”) that is allowed to run unchecked will eventually lead to your ruin.

A Lesson In Sticking With The Plan

If you were following me on Twitter yesterday (Friday) then you’d know that I had what was starting out to be an excellent day of trading turned out instead into a lesson of what breaking one’s rules can do.

Here is what happened…

I was already down a little for the week as of yesterday
I held a couple of trades from yesterday into the morning comfortable with the risk represented by this month’s NFP report due at 8:30 AM
7 AM – When I first checked-in on my positions I was in the money with both positions (before NFP data release) – floating at roughly break even for the week
8:30 through 8:45 AM – An extreme price swing first down then up in my positions’ favor took place
At this point, I had a $1,000+ price swing up
8:45 through 9:15 AM – The market sold off from its highs back to or slightly below pre-NFP release levels
Despite the market’s strong swing back in my face, my trading rules were telling me to stay in but I didn’t (big mistake)
My rules define certain price levels that must be broken to the downside to justify getting out of these positions; these levels were fine and no where near being touched
Instead, I started to second guess my levels/approach…

Overbought / Oversold Mindset Is Useless With FX

I’m used to hearing the words “Overbought” and “Oversold” thrown around in equity trading rooms and within casual conversations among traders at the local bars/lounges. The terms are also used quite a bit by various television personalities when sharing their opinions about certain stocks. And though it might be possible to roughly determine when an issue is momentarily “overbought” or “oversold” with equities, using the Level II screen as a tool to better gauge buying and selling pressure, it is basically a guess when trading the FX market.

This is because there is no one order book in the FX market (there is no central exchange for FX trades) as there is with equities, futures, etc., – that means there is no one official source of all global trading volume or trades done like there is with other markets. Every market maker has their own volume numbers based on the deals they’re doing directly with other market makers or on behalf of their retail clients (see post, “Behind the Closed Doors of FX Market Makers”). Because this information is fragmented, you have no way of really knowing if the FX pair you’re trading is starting to be overbought/oversold as you might with traditional equity trading.

Retail FX market makers offering platforms that show multiple price levels (appearing like Level II screens in equities) are not true Level II…

The Best Trading Time Frame

What is the best chart time frame for trading and tape reading? Great news, there isn’t any one time frame that’s necessarily “the best”.

Like Einstein said, it’s all relative (though I don’t think he has ever once touched a trade).

The best chart time frame you should be studying depends on the style of your approach and how long you typically want to hold a trade open. In my case, I study multiple time frames but my core time frame is the 4-hour. This means that I look for trade setups developing on the 4-hour chart and use other time frames (larger and smaller) to make sure I’m trading with the macro-trend and fine-tuning the timing of my entry relative the 4-hour respectively.

For example, when trading FX I typically expect for my positions to work out one way or another within a few hours up to as much as a couple of days or so. This is all relative to how long moves take to develop on my 4-hour time frame. So, if it takes 6 four-hour bars on the chart for my trade to develop that’s 24-hours worth of time passing of me holding onto a trade. Six bars on a chart regardless of time frame is not very much data…again, it’s all relative…

5 Essentials of Price Action Trading

A fellow trader, TraderCisco (his Twitter handle), suggested I write a post on price action trading – also known as “tape reading”.

The term “tape reading” comes from the old ticker tape containing real-time stock prices that used to stream endlessly onto the floor of physical stock exchanges in the early days. This was before the electronic ticker that you now see everywhere from the one hanging above the Big Board’s floor, to television and the mighty NASDAQ market site in Times Square. Traders back in the day used to read this strip of paper streaming out of a ticker tape machine (as pictured in this post’s feature image on my blog’s homepage). Ticker tape now is used to throw around during big VIP parades in New York City along the Canyon of Heroes…dealing with the mess afterwards is a different story.

Obviously, the days of reading stock prices on a narrow piece of paper being spit out by a machine is over. But reading prices, tape reading, lives on in its modern form via Level II screens and/or charts. For the purpose of my post, I will focus on chart reading since true Level II doesn’t exist in the FX markets (FX is a decentralized market with no single order book) and FX is what I trade. Here are what I would consider the five essentials of tape reading with charts:…

Psychoanalyze This, Now Show Me the Money

I was emailing a friend on the topic of trading approaches and eventually described how I use charts. I’m a pure technical trader studying just price action – basically no technical indicators. This is something I touched on in an earlier post you can read here.

More importantly though, the basis for how I approach interpreting price action is rooted in psychology – the human psychology of the traders who collectively cause the price action.

When traders of a more fundamental school of thought scoff at the idea of being able to make trading decisions on charts alone, I’m put off by just how close-minded they are. For years we have seen traders successfully create wealth by just using charts or by relying heavily on charts as part of their overall trading plan. Clearly, there must be something to it. And just because these nay-sayers or doubters can’t get charts to work for them it doesn’t mean it doesn’t work.

Charts are nothing more, in my opinion, than psychology in-action and playing out in a graphical form on your screen. It shows the motives of the “players” – are they net buying or selling. At which price levels have they shown no interest in bidding up or offering out anymore. Or conversely, which price levels have they shown tremendous interest…

Behind the Closed Doors of FX Market Makers

Probably one of the best write-ups I’ve seen in a long time describing how retail FX market making works can be accessed here. The article was written by Javier Paz, President of Forex Datasource.

If you ever wondered how how retail FX market makers (like FXCM, GFT, Gain/Forex.com, etc.) make prices and fill trades, this article says it all. I’ve heard a lot of crap over the years from amateurs or those new to trading the FX market who have interesting stories about how market makers screwed their trades. Though it’s possible for a market maker (particularly of a Dealing Desk model – see article for explanation) to routinely “screw” their clients, it’s very unlikely to not possible with external execution (No-Dealing-Desk) models.

The sad truth behind who’s to blame behind so many, “I got screwed by XYZ market maker…