STF discretionary spot Forex system development journal
This journal sets out to share my experiences learning short timeframe discretionary spot Forex.
It was inspired first by the fact that after about 13 weeks of hard work, on paper I appear to be on the verge of consistent profitability trading a single pair (EUR/USD), and therefore sharing results at this point may help others at the same stage (or to reach the same stage) without taking them down too many blind alleys.
It was inspired second in the hope of providing a little entertainment. Hopefully not of the fall-on-my-face slapstick variety, but rather a record of the transition from "the verge of consistent profitability", a forward looking perspective with which most of us are familiar (e.g., early in one's trading career a relatively short-lived delusional state characterized by unusual optimism or euphoria, usually preciptitated by an accidental winning streak), to actual "consistent profitability"--a perspective accessible only to considerable hindsight and a stage considerably harder to achieve since it signals mastery of the target instrument & time frame.
No successful system, method or approach that I know of is guaranteed to work except for the trader who developed it. I accept developers may prefer to market a trading system to recover R&D costs and make a living by means other than trading, since trading is relatively hard work. In light of this there are rumoured to be a spectrum of legitimate 3rd party systems & services out there tailored to the size of the knowledgeable investor's / trader's wallet & his or her investment style (as opposed to illegitimate systems geared to the naive trader's gullibility), but I've yet to prove any. In the case of 3rd party systems we purchase & operate ourselves, IMO unless the system comes with an experienced trader telling us which button to press and when to press it (e.g., access to a trading room), or comes with sufficiently agile expert system built in, one still faces the inconvenience of learning how to trade a particular instrument.
Background & Aim
I'm essentially retired, have an undergraduate degree in pure math (that I was told once in Canada qualifies me to sell insurance), a graduate degree in geophysics, 15 years experience with time series analysis and AI methods for data reduction & interpretation and the same amount of time helping run a small business (embedded systems) by managing a team of electronics engineers and programmers.
I've invested for decades, swing & day-traded stocks and auto-traded longish time frame spot currency in recent years.
I became obsessed with short time frame discretionary spot Forex trading a few months ago while trying to improve the efficiency of a Forex swing trading bot, when it became apparent it wasn't as easy as it looked.
In my experience bots that are profitable for longer time frame (1-4 hour bar) currency trading don't optimize for shorter time frames. From my perspective this occurs mainly because signal-to-noise ratio decreases rapidly with decreasing time frame. Bots live & die by the adaptability and hence output consistency of their preprocessors (indicators used to reduce price action to inputs required by the trading algorithm), and at some point the increasing number of statistical outliers makes e.g. particle oscillator-based indicators unusable.
Practically speaking (from my previous currency swing trader point of view), these "outliers" at best correlate with missed opportunities for significant gains, at worst cost us big time, but in any event are a constant drag on profitability.
So far it looks like short time frame currency movement in most circumstances is not amenable to time series analysis--price action does not reduce to tradeable statistics because the population is too small and too badly behaved, and the lag of generated signals is too great.
The approach I've taken therefore is to study the effectiveness of commonly available, relatively stationary indicators of the sort that inform various market profile systems (support/resistance levels, point of control & value areas, contribute to value area breakout/breakdown/reentry strategies, momentum however we choose to define it, and so on ). The idea is make it cheap to run with any instrument--not dependent on the quality of the data--and robust--not dependent on the availability of certain data (i.e., trade info for Forex feeds).
The thesis is that bot development is knowledge engineering--developing an algorithm, essentially a state machine, to embody what an expert knows and to mimic what an expert does with as few unhandled states as possible. Whether we avail ourselves of an expert and try to understand his or her methodology or we become an expert and mine our own experience, IMO bot development via either approach likely involves a similar level of effort and the choice is a matter of what turns our crank.
In this case I chose to try to become the expert and this journal intends to document the process.
The aim is therefore 2-fold: first, to learn how to trade short time frame spot Forex profitably; second, to abstract the process--to derive useful heuristics from whatever turns out to guide decision making.
The basic approach is predictably simple: read as much as possible and trade as much as possible.
I've made probably 3000+ live trades on paper at all hours over the last 13 weeks, of which NT captured and/or retains only 2418 due to occasional crashes and database corruption.
Trading was limited to 2 related pairs (EUR/CAD & EUR/USD) to avoid distractions. Along the way I wrote a few trivial indicators to clarify aspects of price action but have more or less settled on the following setup:
Congrats on your new journal, I look forward to reading it
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Sorry for the delay in updating my journal. Even though I think putting my private trading journal into a form suitable for public consumption is a profitable exercise (it forces me to view my trading activity more objectively), it's turning out to be a challenge. Thinking is time consuming and e.g. illustrations take effort to construct. That said, trust journals get easier to maintain with practice
I'd like to illustrate my comments below about setups, entries & exits with some annotated chart images but that remains to be seen--at this point mainly want to put something at least back into the community. I'll be on vacation the entire month of July and thought I could summarize progress to date, such as it is, before taking off.
The bottom line is I haven't yet settled upon a reliable strategy (one with a “positive expectancy” according to Van Tharp) but after 4000-5000 paper trades results are beginning to be encouraging.
In the news: I started trading real money with some trepidation on 16 June not because I was ready but after the paper trading “experience” stalled (IMO crossed the line from experiment to gambling) and I decided I needed a kick in the pants. Since then I've made 250 real money trades with mixed results and am probably ready to appreciate sim trading again Seriously though, I wanted to test my current skill level under the gun and needed to address fears that were beginning to resurface about the possibility of trading "for real", that I suspect were contributing to the paper gambling. The good news is the foolishness instantly evaporated when I started trading with real money and so far the outcome tends to support the likelihood trading for a living may indeed be viable with continued hard work.
I'm still day trading EUR/USD almost exclusively, from an 8 BetterRenko (BR) chart using 4 BR and 1 minute charts to pick entries and 4 hour and daily charts to indicate longer term trends (contemplating a 1 hour chart as well). USD index and Euro futures are always open in the background.
I'm using the following combination of indicators, more or less in order of significance to the methodology:
1. Murrey Math (“MM”, updated hourly)
3. Previous Day OHLC (“PDOHLC”)
4. Regression Channels (the main exception to my rule of depending on static indicators)
5. Bid Volume (plotted by default; would like to develop an indicator for currencies that incorporates both bid & ask volumes as the sum of differences perhaps, since I depend on BR bar volume for signals and feel like I'm seeing only half the picture)
6. Fib methods (on occasion)
7. ADL (mostly because I'm wondering whether e.g. apparent divergences are of any use )
8. 20, 50, 100 & 200 day moving averages & trend lines on daily chart for comparison with analyst comments
9. Daily & 4 hour candlestick analysis (on occasion)
10. Considering popular oscillators (stochastics, MACD) to have some idea what other traders might be looking at
The choice of indicators (like my preference for BR bars) stems from my focus on where exactly to enter & exit short time frame trades--more of a “static, vertical perspective”, in terms of what are the current impediments or lack thereof to price movement, than a longer time frame “left to right” perspective (in terms of historical patterns, including trends, informed by moving averages & oscillators that IMO aid setups more broadly by suggesting bias).
In other words this so-called “vertical (or price) perspective” follows from my so far unquantified belief that
1. In a sense time is less important than price movement since P&L is generated directly by up & down price movement whereas IMO time pertains to efficiency (the fact notwithstanding in reality any movement requires some amount of time)
2. currency price movement can be modelled by superimposing a random walk on top of an underlying directional bias over various time scales; and
3. the random component can be significant. See for example, “Random Walks” by John Norstad, 2011, (http://homepage.mac.com/j.norstad/finance/index.html); and,
4. to some extent Fib phenomena might be interpreted as pre-determined impulse response
In this regard I'd like to find time to explore the notion price movement might be better modelled in random walk terms by convolving selected impulse & bias functions with an S/R “vector” in the presence of noise, but unfortunately unless I were able to sell a book filled with such speculation it would not put food on the table
While the longer term objective is to develop heuristics for automated trading so far I haven't been able to prove it's possible to trade short time frame EUR/USD in a total vacuum (strictly technically, without any knowledge of currency fundamentals). As a consequence, in addition to mainstream news about circumstances that may bias price movement I monitor Babypips.com for scheduled events and CNBC TV, stock & commodity exchanges for market reaction in real time. I also scan Fxstreet.com periodically for analyst comments and suggested S/R levels.
When trading 7-30 pip movements I try to stay 100% focused on price action without becoming obsessed. The door to my home office is closed, email is shut down and the radio & TV are off. If I feel concentration flagging or obsession setting in or lose a couple of trades in a row (the acid test) I either switch to sim trading for a while or take a break.
Also when trading for 7-30 pips I set an initial stop loss based on price pattern but no more than 2% of the account size, and a target 1 or 2 MM levels away unless I'm determined to scalp in a relatively fast moving market. When scalping
1. I don't use stops since they tend to get taken out by noise
2. do use a target to maximize profit (i.e., similarly avoid trailing stops because of noise)
3. keep the mouse over the Close button
4. recognize that since trading without a stop is a VERY BAD IDEA I never scalp unless I'm convinced I'm temporarily at the top of my game.
In general I've found the more compressed the setup (smaller the profit target) the faster losses mount up relative to profits and overall the riskier the trade, hence not an approach I should take for more than a couple of trades at a time before letting the market move without me for a while.
1. study news for any inter-session change in market sentiment
2. check for any scheduled events and note the time (Babypips.com)
3. scan FXstreet.com for comments and any S/R picks & trend lines mentioned, drawing picks & trend lines on the daily chart if significantly different than what's already there.
4. review overnight price action, noting any areas of consolidation or trends. Note price & volume behaviour around breakouts
5. study real-time price action & volume until I have some idea how they are responding to S/R levels in the immediate vicinity of price and what the basic state of the market is (i.e., ranging, trending, impending breakout), perhaps making a few preliminary sim trades to determine whether I'm “getting it”.
With EUR/USD what I'd call pure “range plays” IMO do not seem to occur. However, price does more or less bounce between S/R levels from time to time (“consolidates”), providing opportunities to earn 7-30 pips / trade during retracements (say) and to set up for breakouts.
I try to look for entries & exits in the vicinity of MM, Pivot, PDOHLC & psychological price levels in the direction of any prevailing trend, with an eye out for temporary S/R levels that seem (rarely) to pop out of nowhere. In other words, based on my own trade statistics I no longer enter a trade between S/R levels that are drawn on the chart and do not jump into “breakouts” I haven't planned, e.g. for fear of missing a big move, since more often than not this results in big losses. I'm extremely wary of psychological price levels whether they print automatically on the chart, appear in analyst comments or not.
Entries & Exits
For entries & exits I monitor time-based (1 minute) charts price action and volume as usual to get some idea of momentum but also for time-based patterns in the vicinity of an S/R level since they can be integrated into (and hence hidden from view) inside a BR bar.
I like BR bars for the way they deconstruct time-based bars, exposing any hidden structure.
I study how bars are being built on BR charts since the dynamics can offer tell-tale signals, in particular
1. whether volume is building significantly for a given BR bar, since this tends to signal a decision is pending either as a breakout through or rejection of the S/R level, or unexpected impediment is arising to continuation of a trade in transit between S/R levels;.
2. whether the tail is above or below the body (there is pressure building but movement is biased downward if the tail is above and upward if the tail is below);
3. whether the tail is short ("starts" mid-bar: doesn't reach one end of the bar or the other). This tends to strengthen the bias toward impending movement in item 2 above, but not always. If the tail is subsequently consumed momentum is failing.
While any moving channel-style indicator based on price variance might serve the same purpose I prefer to monitor price position relative to its linear regression channel on 2 scales (4 & 8 BR). I consider it to be a high probability setup when price, one side of both scale regression envelopes and an S/R level more or less coincide.
The regression channel is pretty much the only dynamic indicator I pay attention to. For me it illustrates how price probability distribution and local trend are bearing down on an S/R level, and often seems to illuminate developing price pattern.
I startled myself by making $1400 in an hour or so on a single successful trade last week and decided to transfer $600 of it from my trading account to my bank account. While this might be unwise from a money management perspective at that point I wanted to get a taste of what profitable trading might feel like. It tastes GOOD
Perhaps needless to say I subsequently lost the $1400 & more, but the memory lingers.
For the record, recent excerpts from my private trading journal
Last edited by bnichols; June 26th, 2011 at 10:36 PM.
Reason: Typos, clarity
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Watching EUR/USD shortly after the market opened this evening observed that it broke 4.1600 and seemed determined to stay beneath it.
Based on the short article "Forex: EUR/USD, bears still in control" at FXStreet.com and the fact that last week 4.1600 had proven formidable support decided to sell if it broke through yesterday's close as well, even though my heart wasn't really in it (5 hrs sleep last night & it's late). The opportunity seemed too good to resist in that even if I messed up the entry (which I did) the market would likely forgive, which luckily it did. The entry (1/2 lot x 4) reflects the fact I was aware I wasn't on top of the game but gained confidence as price action continued to consolidate more or less below yesterday's close. 2 lots @ 22 pips real money was a decent wage for 30 minutes work so decided to pack it in for tonight rather than trust the market to forgive me twice.
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Last edited by bnichols; June 26th, 2011 at 10:53 PM.
Reason: Corrections, clarity
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Yesterday was a write-off except perhaps as a (re)learning experience. I made a few tentative scalps and lost more than I made (ca. ~ $50). The problem was psychological: first, I'm focused on reports that the EUR/USD is highly volatile due to circumstances in both Greece & the US and trading in a range that could bankrupt me (or would have a couple of years ago).
Second, I wanted to short the market yesterday and price refused to cooperate. I know from much bitter experience that even if I managed to consciously accept the fact EUR/USD was going up the knowledge somehow would not filter through to my "trading brain" and I'd likely stumble somewhere, so I packed it in early.
Today was different in that I managed to overcome my fear of market volatility (that seems to translate into a fear of market heights) long enough to make one long EUR/USD trade.
Overnight & just prior to taking the trade I talked myself into believing the Euro was likely going to rise when New York came online, given the following factors
1. There is yet another Greek vote on Wednesday and if folks were going to "buy on rumour" yet again then I would too (given that last time I "bought on news" I got creamed).
2. Comments on FXStreet proposed a selection of what I thought were realistic S/R levels long & short
3. US stock market futures were up and continued to rise into the open.
By 10 AM AST, half an hour before the NYSE opened it looked like price was consolidating around MM 2/8 and therefore planned to go long from there.
The entry was a bit of a fumble (see charts below).
I notice my heart still starts to pound in the moments prior to entering a real money trade and have to remind myself to breathe--in through the nose, out through the mouth...repeat... :-/
I try to enter on a retrace with 1/2 contract. Once it looks like price has retraced as far as it's going to go I tend to top up to 2 contracts. Today I topped up with 1 contract, for a total of 1.5 because I wasn't feeling that cold hard sensation of certainty (for lack of a better way to describe it) I think I probably should be feeling--a feeling I noticed for the first time when starting to trade real money last week.
Entry went as follows:
1. initial entry before the NY markets opened around 10:05 (overconfident 2 x 1/2 lot) at MM level 2/8. Price hit MM 3/8 (15 pips) before backing up over top of me and I closed the trade more or less at break-even.
2. Stupidly I hit the "Buy" button again at 10:20 AST with 1/2 contract at the same point I closed the previous trade, before determining whether 2/8 support was going to hold and sweated bricks as price sank, until the N Am stock markets opened at 10:30 AST. I suppose I thought it was going to be my 1 trade of the day and therefore if it weren't going to work out better find out ASAP, or something like that.
3. Given positive market open and general exuberance on CNBC hit the Buy button again on a full contract and decided to stick with 1.5 contracts "until further notice", which turned out to be the entire trade.
At this point I still didn't have a stop or a target.
Maintaining the trade
This trade reminded me that while I am intimately familiar with emotions trading evokes and may be somewhat better equipped to rein them in before they get out of hand these days, I still feel them.
I talked to myself and to the monitor constantly in the 1st 20 minutes while price rose to MM 3/8 and then started to retrace just as before. While price retraced I put a stop just under MM 2/8 (just under break-even). Despite the fact I've read one should not dwell on the $$$ I still do. I watched the trade claw its way up 25 pips to $375 and then back down to $120, and it was tough to place a stop below my entry knowing I was essentially deciding to throw away a sure 100 bucks on no more than a gut feeling.
Things got better after that.
Even before price reached Pivot R1, based on the general enthusiasm with which it was rising I finally placed a target at MM 8/8 (psych level 1.4400) and just below Pivot R2, which immediately made me think "pigs get slaughtered", but assuming I'd choose the exit by carefully managing the stop.
To make an hour long story short, as price advanced past each MM price level and began to approach the next I moved the stop up to just below the bottom MM level.
There were 2 occasions when I moved the stop to a price that was not just below a MM level: first when it approach MM 5/8 after clearing Pivot R1 at 1.4352 (placed stop at psych level 1.4350); and second after profit exceeded $1000 near the end of the trade--I set it just above MM 6/8 to guarantee $1050 after fees simply because I wanted to be able to tell my wife "I made over $1000 today"
In my defense the trade was getting a little long in the tooth, beginning to retrace from MM 7/8 before taking another run at it--but at the end of the day I didn't want to risk bragging rights. Even though when setting up I'd already decided to stop out rather than target out, not the most disciplined way to plan an exit :-/
It turns out price failed to breach MM 7/8 so feel somewhat vindicated, even though thinking a little more objectively I probably would have lowered the target from MM 8/8 to MM 7/8 to squeeze another 13 pips out of the trade rather than stop out unnecessarily.
The moral for this week's trading so far is we might do what we can to identify a setup, and may try hard not to botch execution too much, but the rest is up to the market: even at the top of our game it alone decides whether we make money, or whether we lose, and how much. I don't feel any particular pride or elation being above water so far this week--more just looking forward to vacation & getting away from it for a month.
Once again, smart money management aside, I transferred 1/2 the profits to my bank account, this time not only for the morale boost but partly to avoid the temptation to trade amounts greater than my expertise warrants.
Managing this kind of uncomplicated trend trade probably lends itself to a bot that isn't much more involved than an NT ATM strategy and I'll likely give some thought to implementing it. If so will post it here.
Edited to add: while I expected some sort of sell off when the move was over (in this case turned out to be about 50 pips) I avoid trading the retrace after big moves because
1. I'm not yet able to change mental gears reliably enough to try to capture a retrace successfully (have tried and tend to fail).
2. At this stage taking on another trade after a satisfactory trade completes amounts to "piggish" behaviour apparently & unnecessary risk to capital, since my personal stats show in general the larger the number of trades I undertake the more likely they will fail.
The 2 charts below show the trade (1 minute & 4 BR).
1 Minute chart:
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Last edited by bnichols; June 28th, 2011 at 05:33 PM.
Sim traded the entire session today except for one live short that netted $7. I'm not ready to trade high volatility events like the Greek vote live.
On the other hand sim trading netted $1200 when the EUR/USD dipped about 100 pips in 1/2 minute I happened to be short because I was testing the possibility the assumed price already reflected good news & the Euro would subsequently sell off as it did last week, but didn't expect that kind of drama. As it turns out the sell off did not materialize (price eventually rebounded) so decided to stay away until I could figure out what was going on.
Last edited by bnichols; June 29th, 2011 at 10:42 PM.
Vacation for a month? You certainly have something to look forward to
Have you thought about the mental side of this trading process? There is a lot of material about putting your mind into the right frameset to trade. I just read a blog post by Lance Beggs where he talks about just that. Even while in the middle of a trading session, there are thought processes you can employ to bring your mind back into the space where you want it to be - i.e. ready to trade. You just reminded me of that with your comment about entering or not entering the next trade after a successful prior trade.
Also I wanted to say it's interesting to read about your exploits as you are at a point one step ahead of me.
Best of luck and I hope it keeps progressing.
You can discover what your enemy fears most by observing the means he uses to frighten you.