Market Worksheets

How to keep track of many markets everyday? This is a useful method I learnt from Bill Williams' book Trading Chaos:

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This is a daily worksheet that the trader has to fill out in order to keep himself in touch with the markets. The rows are the different markets he is trading. The columns are the different parameters he needs to fill in. Let's go through one by one.

1. Two bar reversal: This is a strange name, but to put it this way it is simple: this is a level where a two bar reveral has occured on a larger time frame (e.g. daily/weekly) not the one used in trading (e.g. hourly), so that the level is a very important one which can usually be used a catastrophic stop.

2. Rhythm: This is further divided into two. MACD is the value of Bill's MACD indicator with the settings of (5,34,5), which, actually, is the Awesome Oscillator. The other parameter, TWR, stands for Tide-Wave-Ripple and it just means whether the trend is going up or down. How to tell? In this book Bill does it by SMAs of 5, 13 and 34. If SMA 5 is below the other two, put a "v" downward arrow; if SMA 5 is above the other two, put a "^"; otherwise put a "0" down. However, in his later work, Bill replaced the three SMAs by the Alligator.

3. Hump: The last fractal opposite to the trading direction that serves as a stop.

4. Thumb: The entry level, which is usually the last fractal in the trading direction.

I think I am going to change the items a bit to make it suit my trading methodology.

LMT Forex Formula - Here you go

Recently there is a commercial system called LMT Forex Formula. It contains a set of indicators that you can load into MT4, for an "introductory price" of USD 149. Here's how it looks like after you load it up:

Now if I add a very simple indicator called Moving Average Convergence Divergence, which is known as MACD in short and comes with no charge in any charting software. And change the settings to 5-13-x:

Or how about a free indicator called "MACD_Colored_v105 Dark.mq4" that is downloadable online:

Now you may understand why I think it will be much more appropriate if the whole thing is named "How to trade with MACD".

To be fair, Dean Saunders has come up with a very nice system that really makes profit, and deserves credit for creating the system. However, the indicator part can actually come much cheaper. For those who want to learn more about using the MACD, I suggest a book called Trading Chaos by Bill Williams.

Politics and Markets

From: Profits in the stock market by H. M. Gartley (1981), p.105, Lambert-Gann Publishing Co., Washington.

Politics must be given proper consideration in studying major trends. The evidence of the past 80 years seems to indicate that conservative administrations (Republican) are more likely to brred bull markets, while liberal administrations (Democratic) tend to breed bear markets. If a Democratic administration (liberal) is in power, and a bear market has been in progress for some time, the period between the election (early November) and the inauguration (early March of the succeeding year) is likely to be a major turning point to a bull market.

Conversely, if a Republican administration (conservative) had been in power for some time, the election of a Democratic administration (liberal) is likely to be the turning point to a bear market, providing a bull market has been in progress for some time.

Furthermore, if either a Republican (conservative) or Democratic (liberal) administration pursues a policy either through taxation or reformative legislation, which shakes the confidence of security owners, a bear market is likely to result, unless definite inflationary steps are pursued at the same time. Good examples of this are illustrated in the "Rich Man's Panic" of 1907 when Theodore Roosevelt " busted the trusts", and in the bear market in the utility stocks from July 1933 to March 1935. It seems obvious that if Franklin D. Roosevelt's administration had not pursued a policy of inflation, from 1933 onward, Industrial and Railroad stock prices would have also been in major decline.

Instant Pips Profit

The Instant Pips Profit trading technique for range scalping:

I have been using it in EURAUD and EURGBP during the New York Opening (Hong Kong Evening) with great success.

A note of caution: this only works when the price keeps bouncing between the band, if there is a clear trend that the price moves only in the upper of lower half of the band, then this technique is not applicable.

Be the Brain not the Tool: My Attitude on EAs

Be the Brain not the Tool: My Attitude towards EAs

Abstract

This article summed up my attitude towards trading with Expert Advisors, known as EAs in short. EAs are trading robots that execute trades according to a preset formula. My attitude is that trading is a game of accumilation of small edges in probability, and whatever that increases my number of edges are welcome. I think that EA can increase my edges as long as: a) I understand the mechanism behind it, and b) it allows sound money management, in particular mulitple entries and exits. I am also againt the common attitude towards the use of EAs, which consists of treating them as Holy Grail and using them before acquiring proper manual trading skills and experience.

Introduction

I'm never a keen tester or reviewer of Expert Advisors. For those who don't know, Expert Advisors (EAs) are automated trading programmes which are executable on the popular platform of MetaTrader 4 (MT4). In others words, they can make trades for you when you are not at the computer, or "make money while you sleep" as it's been advertised by vendors.

On online forums, I seldom join the discussions and much less the testing of various EAs. It's not that I don't like EAs, but I don't like the way they are discussed. I say this because their discussion has nothing to do with making you trading more profitable, and instead it is more like reporting news of a celebrity in auotmated trading.

Be the casino: how I view trading

Before going further, I would like to write a paragraph or two to describe my philsophy on trading.

For me, trading is a game of probability, you win the game by beating the odds. Think about it like the casino. The casino has set the rules in a way that the long term probability is already in its favour, so that although customers have occasional big winnings, in the long run they can benefit. The same is and should be the mindset of a trader.

The casino has various ways to increase its edge of probability. They have great resources for catching cheaters. They don't have clocks in the hall so that you easily forget the time and keep playing, and the more you play the greater chance you lose. They limit your time to think and plan. The list goes on. Similarly in trading, whatever that increases your edge should be taken into account, that will include sound money management, emotional control, finding an honest broker, etc.

In all, trading is a game of probability, the aim is to increase your likelihood of winning and not to take unnecessary chances.

How EAs increase your edges

Can EAs increase your edges? Certainly. Robots don't have emotions, they always follow the plan. They never get tired, you don't have to worry about oversights. They are automatic, and quick to enter, modify and exit positions. Most importantly, you don't have to be present in front of the computer.

The problem is, EAs have their problems too. They are based on sets of hard rules, i.e. they are simply following orders. The problem of how to trade is to be decided by the trader. It's like telling a taxi driver to drive me to the place I want when I do not have a car with me, but going to that place should be my own decision. Similarly, I can tell my EA to enter a trade today at 8-10 am EST when the 5 and 13 EMAs cross and 10 period RSI crosses 50, but why I have to do it today at this time, not yesterday, not another time, comes from my experience with the system.

Why don't I just let the EA run by its own course? Because the EA itself does not know when to trade and when not to trade. To put it more scientificly, the EA had no idea when the system has a high probability of winning and when the system has less chances. If you just let an EA to run by itself and it encouters a time when the market does not suit the system, you are going to lose. As I said above, trading is about increasing your probability of winning, and just blindly let your EA run is not a way of doing it.

Therefore, to increase the probability of winning with an EA, one has to gain a good understanding of the system employed by the EA. In fact, a good EA is usually coded from a manual method traded by the coder himself or someone the coder knows. M5G Cyborg is one such example. When the coder knows a system inside out not just in theory but also in practical experience, he is more likely to be able to increase its strength and cover its weakness. This is similar for a trader. Only by having experience with the system behind it, we can predict with confidence how probable the EA will make money in certain conditions.

The Only Holy Grail: Money Management

There is no Holy Grail system in trading. There are only systems that gain more than lose in the long run. For this to happen, one must make sure he can stay long enough in the game so that the probability is on his side. The only way to do this is: don't lose too much in one trade.

If there has to be one thing that, if done, can guarantee you success, then I can't think of anything except good money management. Instead of going through a tedious lecture of how great money management is, I am going to tell you a real story that happens online.

Colin McGinley was the first runner-up of the 2007 FX Trader of the Year competition in FXStreet in which he gained 35.3%. He actually finished third originally but the winner were caught cheating. Anyway, he kept his trading record in 2007-2008 in this post in his blog, and this is what he said there:

"Up until August 2007 my monthly target return was always in the 3-5% range. In August 2007 I decided to become slightly more aggressive and began to target a return of 7-10% a month.
I became more aggressive in two ways. The first was to increase my gearing on individual trades by 50% as compared to what I had been using previously.

"Secondly, I started trading on additional pairs. I added USD-JPY first and have recently also added AUD-USD.

"In retrospect, mainly due to the larger than desired unrealised drawdown in November 2007, I have decided to cut my gearing back to its original levels. I will continue to look for the additional monthly gains through trading on multiple currency pairs."

So, he almost blew his account that month by losing almost 80% of his capital.

If an EA allows smart money management by the user, then it is no doubt this is a great edge in increasing the probability of winning. Many EAs have already got the function of auto position sizing, so it's no big deal. Money management, however, is not just about risking only 5-10% of your capital. One of the most important technique in money management, in my opinion, is scaling in and out of a position. One thing I really look for in an EA, but most of the time I can't find, is the option of averging an entry and exit.

Averging an entry means that instead of entering the whole position one time, you instead enter it bit by bit. My favourite example is that, you first enter 2/3 of the position, and after the price moves (say) 10 pips away from the original entry, either in favour of or against you, you enter the rest 1/3. Anyone with experience in trading knows that you cannot always enter and then the price goes in your direction. By averging in you are able to reduce the risk of entering at the wrong time.

The concept is similar for averaging an exit. These are very mechanical thing the requires precise timing, and it is better done by a computer. Remember I talked about one edge that EAs can give you is fast execution? Whatever that increases your edge should be done, and whatever things that EAs can do better than you should be left to them.

How the crowd discuss EAs

Now you may understand why I don't like the way people discuss EAs, espeically commercial "black box" systems. They look at how great the past performance it has, not worrying whether they are genuine or not. They don't care about what systems does the EA really contains. All they worry about is tweaking it with different settings, testing it in different brokers, and give out graphs and numbers about their newest findings.

There are nothing wrong with such practice, and quite the contrary I apprecaite people spending their free time in contributing to the society. However, as I said above, the only way to let an EA work for you is to have hand-on experience with the system or systems behind it. The problem of the common practice of EA testing is twofold. Firstly, they don't try to understand the system behind it. Secondly, they do not go back to the graph and actually study why a trade failed. Of course, not all testers are like that, you can find testers who have a healthy understanding of trading, but most of the time the testers are some people who haven't even made a trade in a live account ever in their lives.

Furthermore, I feel that most tester in online forums are simply too lazy to worry about possible failure of their Holy Grail EA. They are mesmerized by the beautiful backtest results and then they start to dream about becoming a millionaire someday, instead planning what to do if their EA somehow fails to work in the future. What will you do if your trusted EA start losing money? Do you judge it as occasional loses or market condition changes? Will you stop using it, and if so for how long? How can you tell when it is time to start using it again?

Once again you see the importance of becoming familiar with the system behind it. If you do, you may already switch off the EA before it loses money. If you all know is that the EA gives out buy and sell arrow, what can you do about it? This is why you should not treat any EA or system as a Holy Grail, and you should understand the system behind the EA.

Conclusion

I always think that EAs, or any indicator or scripts for that matter, are only the tools of trading. Whether they are profitable or on depends on how they are used. Most people are slaves to EAs: when things don't work out well, they imprision themselves in front of the computer to try various different settings in vain. A good trader, on the other hand, should be the brain before any trade and only use the EA to help him carry out the plan. This can only be done by acquiring a thorough understanding of the system behind the EA and exercise proper money management.

What Makes a U.S. President Popular?

(From: http://www.elliottwave.com/freeupdates/archives/2009/05/08/What-Makes-a-U.S.-President-Popular.aspx)

Anytime that presidential popularity is the topic, you're bound to hear the word "charisma" thrown around. Remember how charismatic President John F. Kennedy and Ronald Reagan were thought to be? But what truly makes a president popular has less to do with his personality and much more to do with the state of the stock market. This question-and-answer with Bob Prechter excerpted from Prechter's Perspective gives the background as to why that is so. More recently, Bob spoke about the change from the bearish markets in February and March to the recent bear-market rally in his April 2009 Elliott Wave Theorist. Right now, we are in the middle of what Elliott wave analysis calls a wave 2 correction of a larger downtrend. Here's what Bob has to say about the difference in social mood between an upturn and a downturn in the markets.

"Wave 2, regardless of its extent, should regenerate substantial feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us. Be prepared for this environment; it will be hard for most investors to resist…."

*****

Excerpted from Prechter's Perspective, re-issued 2004

Q: You say that social mood as reflected by the financial markets dictates whether or not political leaders are popular. Have you used this insight of the market to anticipate outcomes for national leaders?

Bob Prechter: Sure, because the popularity of a country's leader is motivated by the same unconscious impulses that drive the stock market and the economy. A president's actual performance is irrelevant. Granted, this is a hard message for most people to accept. But the Elliott Wave Theorist has used this relationship to forecast the fates of three U.S. presidents when the conventional wisdom was predicting the opposite.

• In January 1987, when Ronald Reagan's presidency was being rocked by the Iran-Contra affair, the Theorist said that Reagan would exit as one of our "most loved presidents."
• In April 1991, when George Bush enjoyed a 91% approval rating, the highest for any president, the Theorist predicted that he would lose the next election. That latter forecast was as long a shot as there is in politics.
• Then, as Bill Clinton's term began, we predicted that he would be pushed from office. It didn't happen, but he was impeached.

Learn How the Future is Fully Mortgaged. Do you want to know where the final credit implosion is headed? Or what will happen when this bear-market rally is over? Get the most insightful information in the April issue of The Elliott Wave Theorist.

Q: What about the next guy?

Bob Prechter: [Editor's note: Remember, this interview took place before both President Obama and George W. Bush were in office.] The next president, and maybe even one or two after that, should watch out. They will have to ride out the slide into a deflationary crash and depression. The party of the person who is in office during the worst of it will be devastated politically.

Q: You apparently don't take sides.

Bob Prechter: No, my analysis in non-partisan.

Q: Can you apply the rules of Elliott to political analysis?

Bob Prechter: The guideline of alternation seems to apply. It has a specific technical meaning in wave formations but also pertains to social trends. For example, you might recall that Richard Nixon won re-election in a landslide in late 1972 at the peak of a bull market. Despite everyone's high hopes, he was hounded as a law-breaker and ultimately driven from office in August 1974 by the social mood reflected by the bear market. Bill Clinton took office with the market at a new all-time high amidst strong popularity, a Time "Man of the Year" cover, and high hopes for his performance. Like Nixon, he was hounded as a lawbreaker as the market corrected in 1994. Instead of Watergate, it was Whitewater. But one was a Republican and the other a Democrat. The specifics alternate. The essence repeats.

Q: Back in 1989, when two-party politics appeared assured forever, you predicted a third party and a shake-up of the traditional parties.

Bob Prechter: Yes, because what normally happens in the type of period that is approaching is a polarization of opinion in all kinds of areas. It's not just that the left takes over or the right takes over. During bull markets such as in the 1950s and the 1980s, most people are centrists. In bear markets, you see extreme polarization. You get leftists and rightists on one axis, and authoritarians and champions of individual liberty on the other, battling it out for power.

Q: Is there necessarily a direct relationship? Do the social dynamics that make investors buy or sell stocks also influence the electorate to choose one presidential candidate over the other?
Bob Prechter: Yes. The single best predictor of presidential popularity is the trend of the Dow Jones Industrial Average. The precision with which presidential popularity has tracked the Dow and its rate of change is remarkable. It usually also indicates whether an incumbent will win re-election.

Q: The market simply reflects the social mood, but once the trend is in place, can its performance reinforce what's going on in the political arena?

Bob Prechter: I used to think so, but I don't anymore. Mood is autonomous. The market is just a meter for it. In other words, it's easy to say that losing money in stocks makes people despair, but I think despair makes the market go down, so they lose money. It has to be this way, or stock trends would never end. So the trend toward happiness or despair causes voting patterns to change. It would happen even if there were no stock market.

Q: Bear market politics seem more interesting.

Bob Prechter: Oh, yeah! That's when people tend to vote for more radical candidates. When the next general decline in world stock markets takes place, the popularity of all incumbents will suffer. If the markets fall as far as cycles suggest, most incumbents will not win re-election. But don't confuse interesting politics with good fun. It's usually scary.

Brainwash your way to trading success

Trader John Campbell, who vends his OilBiz and GoldTradePro trading systems, used to a psychoanalyst. He recently published a book, Success for Trading, on the psychology of trading, in which he suggested a very unusual but effective to increase your success rate incredibly. Here is the method, quote from pages 23-25 of the book:

Hypnosis is one way to connect with the subconscious but the other, more easily available way, is through a correctly constructed 'mantra'. Mantras can be extremely powerful and are the origin of the saying, 'Be careful what you wish for', because mantras can make wishes come true. When we begin to deal with our subconscious mind and higher dimensions, anything is possible. Yes, anything. But we are after soemthing quite small and simple.

In case you don't know, a mantra is something that is said over and over again until it becomes embedded in our being and attracts whatever is in the mantra. However, we've already seen that it's no good just repeating something like, 'I want to be a successful trader,' or, 'I want to be rich,' we have to be cleverer than that. The most effective mantras contain an emotional element. In the area, the intellect is of no use. The intellect is firmly rooted in the black and white world of three dimensions and only believes in what can be seen and proven. Emotions are much more connected to our subconscious - which is why emotions usually win over thoughts.

So, we need a mantra with emotion, a mantra that includes visualisation of already having what we want and we need a mentra that is as detailed and specific as possible. The aim of this mantra is to make that connection with the 'future you' who is the successful trader.

...Here's my suggestion of a mantra construction that worked for me, 'I'm so happy and grateful I earn ten thousand a month from trading.' Short, specific, in the present tense and very powerful. Of course, it could be, 'I'm so happy and grateful I have a great job (in whatever) that pays ten thousand a month,' or, 'I'm so happy and grateful I'm living in a fantastic house with (fill in a couple of details) overlooking the sea,' and so on. You have already decided what your personal figure will be, so substitute it for the 'ten thousand'.

I'm so happy and grateful I earn ten thousand a month from trading.

Ok, we have our mantra that will connect us to it's reality, so how do we use it? Simple repetition for at least 15 minutes a day and preferably half an hour will turn it into a reality. This is sufficient for it to enter the subconscious and become a part of who you are. You can do it at any time but when you wake up and before you sleep are the best times and with your eyes closed. I would strongly suggest at least one continuous period of a minimum of 15 minutes and preferably a bit longer. You could perform it twice a day, morning and evening, if you like.

...It is more effective if you can clear your head of all others thoughts while repeating the mantra in an automatic, parrot-fashion way. After a very short time it will become very easy to repeat and you won't have to think about the words at all. This is good because we don't want it in our head or intellect; we want it in the automatic, non-rantional part of us. The reason for this is that our rational part doesn't believe it is possible (yet). however, it certainly soon will do when that money comes rolling in.

Dojis and Engulfers

I found a really helpful video on reversal candlestick patterns - spikes (dojis) and engulfers, which comes from here:

Download the video here.