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:…

Trading News Events Without Losing Your Shirt

So how do veteran traders consistently make money when trading news events? They don’t.

A study was done by a good acquaintance of mine (a well-known FX market analyst who appears regularly on CNBC) to determine how often the market actually moves in the direction expected based on whether or not the news (financial data) turned out to be good or bad for the market. Interestingly, but not surprising, the market only moves as expected 50% of the time relative to the actual resulting news release. That means, that no matter how hard you try to analyze which way financial data releases (like the big NFP – Non-farm Payrolls) will push the market you will only have a coin-flip chance of being right. Are you willing to bet your hard-earned money on a coin-flip during some of the most dangerous moments in the market? I’d hope not.

Even though traders like myself don’t necessarily trade the news event, we will trade before a news event and hold positions through the event or be flat and not trade until several minutes after the event. So our job is not to…

90% Of You Are Doomed To Fail

If you could start you own business with $100,000 that would potentially give you exponential revenue return without having to necessarily work harder or longer hours wouldn’t that be great? Of course, a business opportunity like this would require you to learn the ropes about the industry and how to run a business. And unless you already have direct experience in the industry you’ll need to roll-up your sleeves and put quite a bit of work in at least in the early months to make sure you don’t make too many costly mistakes that might ruin the business. But you will be your own boss and have tremendous earnings potential providing for a very comfortable life if you can grow the business. I think a lot of people would jump at this opportunity if they had the money to try. Wouldn’t you?

What if I told you that in the United States the failure rate of those starting their own small business (any form – home-based, brick & mortar, online, etc.) is an alarming 90% within the first-year of starting? Yes, this is the same statistic cited for those who begin trading for the first time as well. Meaning, that the high failure rate of new traders has nothing to do with the financial markets or trading as an activity itself. It has everything to do with the kind of planning, execution and careful focused effort people put into running their own small business.

My guess is if you put up $100,000 to start your own business in the above example you’d be sure you put in every waking moment to learn-the-ropes and work incredibly hard to avoid making costly mistakes by putting in serious time to make sure you had the proper foundation for making the business a success. The problem is that most people who begin trading for the first time do not look at trading as a business and treat it as something more like a hobby or see it as “easy money”. You are trading against some of the best minds on the planet…the best that money can buy at all the top banks, brokerages and hedge funds. Would you step into the ring with a professional boxer and fight him after having read a few books on boxing and hitting a heavy bag for a few months? Most would laugh and say, “of course not…”