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.
20th
March
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.
21st
March
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.
22nd
March
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!
23rd
March
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
24th
March
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!
30th
March
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.
31st
March
I don’t think the EURJPY and CHFCHF
are going anywhere, so I am cutting out! (for a loss of
$1100)
New
signals
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.
1st
April
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!
4th
April
Signals:
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.
5th
April
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.
6th
April
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.
8th
April
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
12th
April
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!
13th
April
Signals:
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.
15th April
The EURJPY trade is not going my way
and has hit my criterion, the average, so it must be cut! 40 points
loss
18th
April
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.
Conclusion
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:
“Dear Trialist
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?
| 3 months | $785 |
| 6 months | $1385 |
| 12 months | $2085 |
| 3 months | $1785 |
| 6 months | $3285 |
| 12 months | $5985 |
(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!
TradeCraft Corner
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?
source:ActForex
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.
source:FXTrek
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.
Day 1
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
Day 2
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.
Day 3
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.
Day
4
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!
Day
5
Definitely running out of momentum, but still in the right direction. Looking at the charts, we are still under the 60 EMA line
Day
6
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.
The
Threat
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 luck!
Steve Pickering
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