Forex Trader Mentor
Newsletter # 7
20th April 2005
In this issue, you will see the great results we got when testing and reviewing FX Trend Trader, a forecasting service based on a model. You will also be able to see some other great results we got using TradeCraft as a basis for our trade management and exit decision making.
You will be able to read an article on a neglected but important area of on-line trading, namely security.
Question and Answer Session Transcript
Last month I had the pleasure and honour to participate as the live expert in a Question and Answer session on FX Street. The subject was 'Forex Mentoring - luxury or necessity'. There were many participants and some good questions. The transcript in PDF format may be downloaded here
If you have not experienced a Q&A session, I can highly recommend them . They take place around 15:00 GMT on most days of the week. Take a look at FX Street's website for details.
Report on FX Trend Trader
This is a diary chronicling trading based on FX Trend Trader, a trend reversal model developed by Tony Berry. I worked with Tony in the late 1970’s and he developed this model after working with a major investment bank in the 80’s and 90’s.
The trades were based on a leverage of JUST 2:1! No more leverage than that is required. This made it easier to set relatively long stops. As a rule, the profit target was a risk reward of 2, i.e. approximately 1% movement. However, using TradeCraft, I was able to track the trades using Target Tracker and the dynamic stop/profit take levels. This certainly kept me in trades that I might have taken profit on.
Big day for reversals! I am on the hunt for new trends. I had a feeling that FXTT’s trend reversal levels were being breached, as I could see that the long MA’s were being broken everywhere. The trouble was that the morning’s movements were pretty strong, and the RSI on most of the USD buy signals was between 65 and 75. So I decided to wait for a pull back. I fancy USD/CHF, but not at 1.1775. I would like to wait and see if we retrace back to 1.1730.
The model has given the following signals:
EURUSD sell at 1.3194 (executed at 1.3205)
GBPUSD sell at 1.9006
GBPJPY sell at 200.23
CHFJPY sell at 89.55
AUDUSD sell at .7854
All the trades have been entered into. The only doubtful one was the Aussie, which nearly got stopped out.
Of course, I felt that there were better entry levels! And what happened? 9 pm, and the dollar makes a big move. I am still amazed after sitting for more than 24 hours with non-performing positions – kapow! It all started falling like an avalanche!
I am using approximate ½% stops. Why approximate? I have set TradeCraft up with a $50,000 start capital and have allocated $500 to each trade.
It is 13:30 and I am awaiting the latest signal: So far, I am up an annualised 116% (because I have been trading now for just two days) and my maximum drawdown was 2.12% on the first day - well within my limits. It gives an outright return of 14% in three days. I am learning!
I am now selling NZDUSD at .7241, with a 1% stop. I have used a trick to accommodate the risk, and we shall see if it works!
14:20 EURJPY has reached my 2:1 target, so I am taking profit at 137.45
It is Easter and I do not want to carry the positions over the holiday. First of all the markets are thin, and what cannot happen in the intervening 4 days?
It is 11:20 and I have closed out the following trades:
EURUSD buy at 1.2990
GBPUSD buy at 1.8690
GBPJPY buy at 198.74
CHFJPY buy at 89.01
AUDUSD sell at .7854
NZDUSD buy at .7154
Profit =$10,095 on a start capital of $50,000 in two days-not bad! 136% annualised ROC and 20% outright return on capital.
So it is a Happy Easter and wait for the next signals!
Received signals, one to sell GBP/EUR, which I thought was a bit late, so I didn’t do it. There was a EUR/JPY buy and CHF/Buy at 139.24 and 89.69 Respectively. I did these with ½% stops.
I don’t think the EURJPY and CHFCHF are going anywhere, so I am cutting out! (for a loss of $1100)
Selling EURO/YEN @ 138.46 (Signalled 138.87)
Selling EURO/CHF @ 1.5490 (Signalled 1.5493)
Selling CHF/YEN @ 89.39 (Signalled 89.63)
These arrived by SMS, part of the service from FXTT.
17:00 NAPM figures out-a whopping 69.2.Do you believe that? -Well, the positions are looking a bit sick, but I will stick it out. I have dropped a $1,000 unrealized profit until now, but I am hanging in there. Patience, my dear boy, patience.
The EUR/CHF is definitely not performing. I have a .4% stop, which has not been challenged. Anyway, it is not going my way.
New signals, reversing the previous ones!
Buy EUR/CHF at 1.5519
Buy EURJPY at 138.95
I have reversed the EURCHF for a loss of $220. and the EURJPY for a loss of $476. I must say, I am a bit fed up with these reversals at a loss - but if that is hat the model says, so be it!
Buy USD/CAD at 1.2180
Buy CHF/JPY at 89.69
Buying the cross and reversing the CHFJPY position - I have been in since 31st March and it is going nowhere, tying up my capital.
The EUR/CHF is performing, I think marginally. I wonder about this currency pair - wide spread and not much movement.
Otherwise things are looking OK. About $1,000 up on the USDCAD, EURJPY. CHFJPY and EURCHF positions-all in profit.
The FXTT e-mail has come in, signalling for a reversal in the EURJPY and the CHFJPY. As I am showing a small loss in relation to my entry and the signal (sell at 89.69, I am cutting at 89.63. I will hang on the EURJPY position until 13:30.
EURCHF is definitely underperforming-time for the chop. I am convinced that this is not a great pair to be involved with. Result is a small loss of $75.
EURJPY sold the position at 139.57. The performance had been OK, if not a little long-winded. The decision to sell was taken when it crossed back through my target tracker. $580 profit - not bad
No signals for a while.....
I have some positions open, they are dong fine, especially the USDCAD. This is trending smoothly – a trend traders dream.
There has been a signal in USDZAR, but it is not a currency pair that trades on FXCM, so I am letting that one by without comment.
The signal today is ‘buy GBPUSD at 1.8941’. Well, this was an absolute bummer. Got stopped out for 50 points within 2 hours. Well, that’s cable for you!
Sell EURJPY at 138.72 - do it!
CHF/JPY sell at 89.05 - don’t do it! - To be honest, I am steering away from these non-major pairs.
Buy AUDUSD at .7785. My personal feeling that the signal is a bit late. In fact, it has not breached the target. I suppose in that case I should sell it as it was not through the reversal level at the right time, according to FXTT, so lets do that!
Got a similar signal to buy NZDUSD at .7242, but although that is in court, looks a contradiction in terms to buy the Kiwi and sell the Aussie. So I will leave this for the present.
As the test is ending soon, I am not entering into new positions.
The EURJPY trade is not going my way and has hit my criterion, the average, so it must be cut! 40 points loss
The USDCAD is still running! And still performing. I am almost 300 points up. However, I am cutting it, because TradeCraft has shown me that it is no longer performing to the same degree that it has been.
The AUDUSD has reached its target and I am cutting as we go up through the fixed profit target - $1000 in the bin!
That is the end of this test. Today, there has been a mass of signals for reversals.
What does the result look like? According to TradeCraft, I have achieved an annualised return of 64%, well over my 25% target. My maximum peak to trough drawdown (on a daily basis) has been 4.38%. My Daily Profit/Loss ratio is 6.93.
On a per trade basis, my win/loss ratio (number of winners to losers) is 10:9. The profit/loss ratio (profits divided by losses) is 4.46. My profit factor is 4.46.
My risk/reward is .54 and my Sortino ratio is 2.67, which could be improved on (running too large stops, it seems). The average holding time per trade is 5½ hours.
My net profit for the period has been $11,329. In addition to this, interest charges of approximately $700 should be deducted.
If you don’t understand the numbers above, wise up! You should. These statistics are of vital importance when judging your performance.
To be really objective, we also need a longer period and more data.
As with trend reversal systems, you risk getting whipsawed in sideways moving markets. However, when a trend develops, with this forecasting system, you will most likely be on it. Combined with the decision-making and money management features of TradeCraft, we have a devastating example on how forex should be traded.
My suggestion is to TEST before you go live, but if you have to go live, concentrate on one or two pairs. Slippage can be a problem and it is my observation that after a large move, there is some consolidation which leads to sideways movements. The Fib traders would have it that we should have a retracement on these moves, and yes, they do come, but rarely in a big bounce.
The Cable at present seems to offer some good opportunities, but one has to beware of ‘gapping’ that this pair is prone to. This is where we suddenly have a movement of 50-150 points, for apparent no ryme or reason, then the trend is continued.
The EUR/USD is probably the safest pair, because the liquidity ensures that moves are relatively smooth.
It is clear that past performance is no indicator of future performance, but FX Trend Trader has built up an impressive track record.
However, the market does present us with a trend every few weeks or so. If you can handle small losses and stick with the trend, you will make money. That is the secret.
Here is how FX Trend Trader suggest how to use the system:
We hope that you are enjoying using the FX Trend Trader trading model. At this point in your trial period the purpose of this email is to ensure that you are using the FXTT model to its maximum potential.
The “golden rules” with the FXTT trading model are:
In addition to the golden rules, by using a few simple tactics:
1. Half-Position Trading :: Profitability can be greatly increased when using the FXTT model; Many of our customers enter a "half-position" once the T/R has been passed, whatever time of day that the breach occurs. For example; If the T/R for EUR/USD is 1.3000 and the model is currently SHORT, but at 12.30 CET the Live Rate is 1.3015, enter half of your stake to BUY EUR/USD. If subsequently the Fixing at 13.00 CET for EUR/USD is set at 1.3030, place the remaining half of your stake on BUY EUR/USD - as per the FXTT Trading alert email and/or text message. This method effectively jumps ahead of the 13.00 CET reading and, although enhancing risk, can generate greater profits.
2. Three-Part Trading :: Over the years we have developed a simple trading pattern that many FXTT users have fed back positively on. We split a position (say $300,000) into 3 parts. The first part is executed when the relevant T/R is broken (we prefer early morning breaks to late European/NY breaks). This position is kept closely monitored and exited or reversed should the price action return through the T/R before the 13.00 hours reading. Should the Trend Reverse then be triggered and confirmed at 13.00 hours we then enter the other 2 parts of the position ($200.000).
On the first $100.00 we are looking to make at least 30 to 50 points in a currency like the Euro/dollar and 70/100 on the second $100,000. As soon as possible, once we have locked in the second part of the position, we are moving the stop up on the balance to our entry level. The third part of the position is then run at our discretion and helps to satisfy the “greed” factor within every trader whilst also opening up the chance of being in on a big move of several hundred points should this occur.
Both of the above outlined trading strategies also work very well when spread betting on the Forex markets.
Obviously factors such as market sentiment, fundamentals and momentum will come into our calculations and of course different profit taking levels will apply to different currencies. However overall we have established this trading pattern as a good and sound method of taking advantage of the FXTT model and its T/R trading signals.”
What does it cost?
(I know for a fact that Tony has some large banks and fund managers as customers)
Is this value for money? Judge for yourself. Was I lucky? Maybe, then again, luck is always going to play a part. It is all in the money management. All I can say is give it a try, but remember that just getting the right signal is only part of the story
Here is a table of the past un-leveraged performance, taken from the FX Trend Trader website
More than one way to kill a cat.... (Part Four)
This is the fourth in a series of articles about how to make it when you don't have the capital.
As if trading for a living is not a big enough challenge, then organising and marketing a fund will make you life interesting. There are many good traders around who have the performance required, but are not good at marketing themselves to potential investors. I was told of a recent conference in New York, where traders were given 45 minutes in front of investors to sell themselves. One guy was from Sweden and very shy. His performance as a trader was good, but his performance in front of the investors was more like the Swedish Chef from the Muppet Show. He did not get any funds...
It is clear that you do need some assistance in the administration of the business. For example, in the UK, you have to have a Compliance Officer, to ensure that you are abiding by the FSA's rules as laid down in your compliance manual. This cannot be the same person as the trader! There are firms, such as CCL in London, who will provide this service - for a fee!
You need to have an accountant who has experience of handling CTA's. That does not mean that you have to have one of the big accounting firms, but neither should it be the one-man shop on your local Main Street. Taxation can be a major headache and if you don't set your fund up properly, you may be in for a surprise.
A good lawyer is advisable at the stage where you are starting to get investor's money on board. Liability can be a problem and there has to be some watertight rules laid down for performance measurement, as well as prime broker agreements that you will need to have with brokers. Although by this time, you will probably be trading on a multi-bank platform such as FXAll or Currenex and trading in the name of a Prime Broker. This allows you to avoid credit problems. Effectively, you will be trading in the name of Bank of America, Deutsche Bank or one of the other providers.
If you are setting up a fund, you should consider a fund administrator. This is an area where Ireland comes to the forefront. There are 42 firms doing fund administration there. A great source of information is to be found in an archive of papers written by Dermot Butler. They may be found at the Custom House website.
Another unique concept to help traders who wish to manage money is FX World Wide Sean Lee, a former trader, provides a service which is essentially the business administration of a trading operation. They take a fee for this, but have a great network of investors to link up with.
A word about fees: How does a fund manager earn fees? There are two models, which may be combined. The first is a management fee. This is for the general running of the fund, and can be up to 2% per annum, payed monthly or quarterly. Then there is a perfromance fee. This can be up to 30%, but there are variations, such as the 'high water mark', where you will only get paid on performance exceeding the previous high. The ideal fee structure for a manager is "2 and 30", (2% management fee plus 30% performance fee) but this is rarely achieved. It can be "0 and 30" or "1 and 20". Still, if you had $10 million under management with a 1% fee and you achieved a 20% profit, it would generate $500,000 income!
I hope I have given you an idea about how to get started as a fund manager. It is not easy and it is a lot of responsibility. I think you will agree that this is where the real money is - especially when you don't have any yourself!
Ride the Trend
When a trend develops in the market, it is wise to get on it. Am I overstating the obvoius? Yes I am, of course. The biggest problem facing traders is how to stick with the trend and that is how TradeCraft really helps.
In March 2005, the dollar became stronger after a second attempt this year to break through the 1.34 level. It has to be said that these opportunities occur every couple of weeks - well worth waiting for, I think you would agree?
I have drawn the general trends on the chart. How do you get on such a trend? My favorite method is using the 60 period EMA on an hourly chart. In a flat period, you can get a lot of false starts - irritating, but small losses. The idea is to sell or buy on the first close through the EMA. In TradeCraft, you set a stop and an initial profit take level based on a budget, in turn based on a risk tolerance set by the capital.
In this case, we started with $20k in capital and a risk tolerance of 10%, giving a budget of $500, of which we allocated $250 to this trade. That gave us a 25 point stop on 1 lot.
The trade was entered on a close through the 60 EMA at 1.3371 at approx. midnight on March 18th. The rules are quite simple: stop on the constant or dynamic stop, whichever is lower. Watch the target tracking line. If it is at a steep downward angle, stay in the trade.
In the above chart from TradeCraft, we see the trade after 24 hours. The target tracking line is still at a steep angle, the dynamic profit target has not yet been breached, and the average rate (of the closes since the trade entry) has not been breached. No reason to panic or take profit. The trailing stop has been moved up to 1.3345
After the next 24 hours, the trade is performing nicely. We are through the dynamic profit take level, but as we are to the left of the target tracking, there is again, no reason to bail out. Our trailing stop is now at 1.3271. Our criteria now has shifted, because we have a trade that has reached our expectations and then some. Why cut it now? We have a big figure on the trailing stop locked in, so let us use the average rate as the criteria.
The trade is probably looking the most critical at this point and craves some 'ice in your belly' not to take profit here. This is where emotions tend to overcome rules. We have come off the lows, but if we look at our chart, we are still below the 60 EMA. The trend is still in place.
Good decision! - the trend resume with a sharp break down to the 1.3075 level and continued to 1.30. The trailing stop is now at 1.3211 and the average rate is 1.3186. We are again sitting on the left of the target tracker, no need to do anything!
Definitely running out of momentum, but still in the right direction. Looking at the charts, we are still under the 60 EMA line
We could go on..I mean, seriously, we could wait for a close above the 60 EMA, but in my opinion, 6 days of a trend using the 60 EMA is optimal, so today we are taking the profit 10 am EST at 1.2940. $4310 to be exact. That is a return of 21.5%
What is the conclusion?
Trade exit is one of the most difficult skills to master. Even with TradeCraft, it becomes subjective. You have to use experience to judge. That is why rules should apply subject to time and profit levels. That takes skill!
It would be nice if this could be repeated all the time - unfortunately it cannot. There are times when the market is moving sideways and you will suffer multiple small losses as the market cannot make it's mind up. A greater knowledge of candlesticks may help here. However, if you had 10 false starts in a row and one super move, you would still have an approximate 2:1 risk reward ratio.
I trust you can see, that if used optimally the TradeCraft system will certainly lead to profit in trending situations.
IT Security and Trading
I have a friend who is a successful trader, but he was recently taken ‘off-line’, because his PC had been infected with a virus. All his information was on this PC and although he got sorted eventually, he wasted valuable trading time which cost him money.
A little attention to the problem and he would have saved himself a lot of hassle. You don’t have to be an IT expert to be a trader – it has become so much easier in recent years. I am sure that some of you are indeed IT experts, but I suspect that the majority are not.
Your access to the market has to be continuous. If you have trades on, you need to be able to see what is happening, change stops and profit take orders, see how the charts are developing and be aware of news alerts that can affect your trading.
The threats are manifold; you have to be sure of a good, solid connection to the Internet. That means, a credible ISP (Internet Service Provider) and ideally a high-speed connection (DSL, or ADSL). When you are on-line, you security is threatened unless you have a firewall. This is a ‘gate’ where all information in or out of your PC is filtered for threats. These threats are often people trying to put ‘trojan horses’ in your PC, a program that can send your identity to another, for example.
This firewall can be ‘hardware’, a box that sits between your phone or cable connection and the PC, or software. I used to use Norton Internet Security, but IMHO, Norton products have lost the quality they use to have. After some research, I settled on ZoneAlarm Pro from Zone Labs. This has a rules-based system that learns as you go. It works. Some charting and trading platforms need customized settings, especially those running Java, but it is all very painless.
To prevent ‘worms’ and viruses and e-mail or software-borne threats, you need an anti-virus program. Again, I used to use Norton Anti Virus, but it slowed my PC down and the ‘live update’ feature really caused problems once. So I use Bit Defender 8 standard. It comes from Rumania of all places, but they obviously now all about viruses there! Of course there are others, such as Panda Antivirus Titanium, Trend Micro PC-cillin, McAfee VirusScan and Computer Associates eTrust EZ Antivirus among others.
The third category are ‘pests’. These are various ‘cookies’ or bits of code placed on your PC to tell the website next time you visit that you have already been there, they can be ‘adware’, which report on your preferences and surfing habits. Although some of these ‘pests’ are quite innocent, they still compromise your privacy and ought to be removed. I started using Pest Patrol, after it found many more pests than ‘Adaware’, another program I was using, did. The company has been taken over by Computer Associates, but the quality still seems to be intact.
I have not yet heard of trading platforms being ‘nobbled’, but one thing is for sure. Never give details of your accounts or credit card in an e-mail purporting to come from your broker. If it has not happened already, it will happen soon. When the bad guys find out, they may well send a bogus margin call to you.
I hope the message is clear here. Your PC and Internet connection are your tools to be able to trade and make money. Invest the time and money to protect yourself.
Close of Business ACM-REFCO in Geneva, Switzerland have recently come up with new features
to their trading platform. The first is 2 pip speads on EUR/USD and USD/JPY on
accounts of $50,000 and more, secondly they now have a Java-based trading
platform and thirdly, they are paying interest on all positive carry positions
overnight. So they
should and so should the other brokers! FXCM, for example, only pay interest (or
more correctly, the interest differential), for accounts with less than 50:1
leverage. I doubt whether they pay the same amount as they take! ACM have said
that they will pay the same amount as they take. (i.e. depending whether you are
short or long) Good
Close of Business
ACM-REFCO in Geneva, Switzerland have recently come up with new features to their trading platform. The first is 2 pip speads on EUR/USD and USD/JPY on accounts of $50,000 and more, secondly they now have a Java-based trading platform and thirdly, they are paying interest on all positive carry positions overnight.
So they should and so should the other brokers! FXCM, for example, only pay interest (or more correctly, the interest differential), for accounts with less than 50:1 leverage. I doubt whether they pay the same amount as they take! ACM have said that they will pay the same amount as they take. (i.e. depending whether you are short or long)
|Issue 1||Issue 2||Issue 3||Issue 4||Issue 5||Issue 6|
Disclaimer. The information contained herein is not intended to be, and should not be construed as, a recommendation regarding any potential purchase of an investment or the rendering of risk or investment advice. Trading in foreign exchange is a business associated with risk and by entering the site you acknowledge and agree to be fully liable for any actions or investment decisions you make in connection with this newsletter or any linked site.
To unsubscribe please click here