ForexSpirit

Time for a quick peek at what I’ve been focusing my trading energy on over the past few weeks. I’ve shifted my scalping approach to the 4 hour charts. Something new I’m trying is just printing out my charts and scribbling notes on them. It actually feels completely different drawing trend line with a ruler and making notes in my illegal scrawl then plotting things in a charting package. I’ve found it surprisingly refreshing and useful.

The three main ingredients that make up the way I’m trading this approach are: Al Brook’s price action setups, the experience gleening from my scalping attempts and some ideas from Jennifer’s year end report (she blogs on Rob Booker’s Piptoring site).

The bare bones of the approach I’m testing is to look for price action setups on 4h charts. I knew this would require looking at multiple currency pairs but since I had no real preference for which ones to look at I just went with the same list that Jennifer uses to start with: EUR/USD, GBP/USD, USD/CHF, AUD/USD. USD/CAD, NZD/JPY, GBP/CAD and CAD/CHF.

Since I also want to be in and out of the market relatively quickly, I’m shooting for 40 pips as a profit target, with a maximum/disaster stop loss of 80 pips; although anything beyond 40 pips in the red has me looking to pull the plug if I’m watching the trade in real time. I’m using gearing of around 5:1, which results in a 2% gain for a full 40 pip win and a maximum loss of 4% if my 80 pip stop loss is hit.

I’m also plowing my way through Al Brook’s new three part series of books on price action. While I’m only about 150 pages into the first book in the series (after about 4 weeks of intermittent reading), I feel the quality of these books is going to be priceless. If you got value out of his earlier book, Reading Price Charts Bar by Bar, then I would heartily recommend that you pick these up too. The writing is clearer and not quite as densely packed with information. What hasn’t changed is the amount of time you’ll spend pouring over the charts digesting every piece of price action information that Al is able to glean from a chart. And there are a lot of charts.

My first trade with this method was on January 6. Progress to date has been a little bit rockier that I would like. My first six trades over the first week had me at -3.3%. I then turned what could have been a 6% gain on January 12 into a 6.3% loss by getting impulsive and jumping into two trades on the spur of the moment. That bugbear still bits me in the ass sometimes.

Staring at a 10% loss for my first two weeks of effort I got laser focused and managed to churn out 4 good wins last week. Which has me standing with a -1.8% loss overall for the month. I was reminded of Don Miller saying how he always seems to trade best when getting himself out of a sizable drawdown. Not wanting to see that drawdown get any bigger certainly had me crush any impulsive notions and focus on only taking trades that made total sense to me.

I thought it would be useful to record my pen and paper notes so I’ve scanned them in and put them into an image gallery below.

[Show as slideshow]

After a journey of 2274 pips (and back again), taking place over 16 months, my longest surviving millipede trade hit its break even stop yesterday evening.

The trade was a long EUR/USD entered 23:34 EST, 9th September, 2010 at 1.26653. It was entered into my trading ledger as a completed trade 18:24 EST, 8th January, 2012 at 1.26654. It netted an outrageous 0.1 pips.

In the months of November and December 2011 my trading foo completely escaped me. I attempted 24 trades on EUR/USD, mainly during the month of November and early December before taking a break in frustration. 13 trades hit BE while the other 11 hit my 50 pip SL.

I thus currently only have my prior two millipede short trades on EUR/USD right now. The first was entered on 29th August at 1.4508; the second on the 30th October at 1.4053.

While I did take a complete two week break from trading over the Christmas and New Year holidays, I have not been idle. I hope to get back to more regular posting in the next week or so and will cover what I’ve been up to then.

Trading can be a total roller coaster at times. The unrelenting risk-on that has unfolded all of October being a case in point. Try as I might, I just couldn’t put my head into full-on Euro bull mode. In the end that has cost me.

In EUR/USD it meant I missed out on the opportunity of having any long legs active. For the first 10 days of October I did actually place a few cautious long entries, all of which got stopped out at BE. After the trend channel breakout on October 10 I just couldn’t get my head around going long yet. Nothing was sorted out as far as a comprehensive solution to Greece or the European banks. According to ForexLive the majority of the whole move up is just short covering. Everyone was short up the hilt and even the possibility of a big step towards a solution was enough for everyone to pull the plug on their shorts, thus causing a cascading effect where the market just rampaged north.

In other currency pairs, ones that I don’t have as much of an intimate knowledge of, I paid too much for the chance of participating.

Even though I didn’t profit from the big run-up in EUR/USD I was conservative enough to only have a drawdown of 227 pips (150 of which come from 3 failed short top picking attempts Wednesday and Thursday; see, still only looking for shorts!). On the other hand, I’m not at all happy about my performance in other currencies, where I left dud trades on too long and had to cut my losses.

As much as September showed how much potential the millepede method has when you get to ride a trend, this month showcased that when I miss the reversal of a trend I’m not able to switch my conviction definitively and that spreading my trades over too many pairs is haemorrhaging too much money too fast.

Earlier this week I thought of three keys words that I want to keep my mind focused on when I’m contemplating a trade: participation, patience and picky. These are my three little Ps and the market is the big bad wolf.

Participation: you can only make money if you actually place trades. You have to be in it to win it. This means being willing and capable of placing trades. I have no restrictions as to when I can place a trade. I will prefer to place a trade during the day so that I can more easily monitor it and move the SL to BE when I think it has moved into enough profit. I’m not adverse to placing trades on Friday, during the Asian session, or other ‘slow’ periods that other traders often avoid.

Patience: The market’s not going to move 100 or 200 pips every day, so it can often make sense to not trade. A big part of the millipede method is a waiting game. Even when you have profitable legs active you generally have to wait weeks before you can reap the profit of what you’ve sown. Having patience is often counter to wanting to participate.

Picky: the pivot that tips the balance towards either participating or being patient and holding off is being picky in the entry setups that I’m willing to place a trade on.

I’ve also made two other decisions relating to how I trade day to day. Starting next week I am going to only look at trading EUR/USD. I have been consistently profitable trading EUR/USD with the millipede method. It is the currency I have the most experience with (by a long shot). Every other currency I am either okay with (AUD/USD, EUR/CHF) or terrible (the rest), as evidenced by my trade results. Instead of placing potentially three or four trades across multiple currencies on a given day I will instead be solely focused on EUR/USD, where I’ll stick to pulling the plug if I experience two losses in a day. I don’t really expect to place more than two trades in any given day anyway, but I’m going to keep that rule for those days when I get a rush of blood to the head and want to make back whatever strife has befallen me.

Up to now I’ve been very loose with my initial SL levels on newly opened trades (i.e. there haven’t been any, thus the USD/CHF pain mentioned in a previous post on the SNB intervention). I’m been slowly reigning that back in and I’ve settled on having a 50 pip SL level right from the get-go. When I have a trade underwater it ties my hands mentally about knowing what the best course of action is. The open trade acts as an anchor that blinds me to the best course of action and I’m unable to determine what direction I want to be trading in. The sunk cost fallacy grabs hold of me and won’t let go. Since I’m narrowing down my focus to a single currency pair once again I don’t want that sort of albatross around my neck for days on end. So the 50 pip SL is there to clear away the baggage when my entry has been average or poor.

These changes are simply trying to focus on what seems to work for me and cut away the things that aren’t. Maybe I went too far thinking I could trade eight currencies simultaneously. I’m tussled with this aspect of the millipede method before. If you only focus on one currency, how well can you do during ranging periods? What if there are no big trend moves? The multiple currencies are a way to mitigate these problems. Unfortunately they seem to cause more problems for me than they solve. Thus, instead of chucking in the millipede method (and in process probably trading for good), I’m hunkering down on what I’ve been good at in the past and trying to leverage the currency pair that I know the best: the good, old Euro (if it manages to live through this crisis).

As another month has rolled around (okay, so I’m a bit slow) I think it’s time to get some statistics up on how my return to millipede trading is going. In the six weeks that I’ve been trading live again:

Total number of closed trades: 52
Number of open trades: 20 (18 of which have their SL set at BE)

This is the breakdown of closed trades:

There are two easy things to take away from the above table. The first is that I closed two trades in Aussie for 1001 pips that more than offset my outstanding loss of 138 pips. The second is that USD/CHF was a nightmare. As discussed in my last post I got caught out by the SNB intervention and eventually bailed on my severely underwater positions. Those costs me 1780 pips over 6 trades (although the bulk of those losing pips were in the one trade that got caught off guard).

Here’s what my diversification targets are at the moment (i.e. the minimum target I have for closing out any open positions so that I offset losses incurred since my last diversification):

For example, if I had any intentions to close out a profitable trade or two in EUR/JPY I would want to make sure that those trades had at least 251 pips of profit so that I pay off the expense incurred by the two losing trades I’ve already closed.

The 20 open trades have a unrealised pip balance of over 8000 pips. It’s probably no surprise that EUR/USD is the biggest beneficiary here, with six short trades standing at over 3000 pips. Unless the situation in Europe turns drastically positive in the short term, I’m planning on holding these trades until 1.3000 where I’ll diversify.

I’m tempted to diversify one of two outstanding AUD/USD shorts since they’re both over 1000 pips.

I was fortunate to start trading the millipede method on my live account at the right time; the euro had been range bound all summer and broke out to the downside shortly after I started. I wonder how I would fared if I had been trading during those summer months: would I have overtraded looking for the next big move or kept my powder dry?

I got a voice mail last week from a lady ‘at the office of Jason Adams and Forex Pro Cloner’. She advised me to call her back. I can only imagine the upsell she has lined up. I’m almost tempted to call her back and let rip on what a bunch of classic scam artists they are, but judging by the thickness of her Asian accent I don’t think it would be a very fruitful conversation. I’ve already rendered judgement on their atrocious product and can only be saddened by their gall to try and fleece customers out of even more money. If anyone wants to find out what I’m missed out on, feel free to give them a call at +1 (855) 563-3033 ext 4300.

On the flip side, I can recommend a presentation given by Joe DiNapoli from last November for the Chicago Mercantile Exchange and the Las Vegas Expo. It is broken up into 5 parts on YouTube: