ForexSpirit

Comment from chainastole
Time 24 October, 2007 at 4:24 am

Hello, Colin.
I exactly planned to write you when making my way to work in the morning and here comes this post which closely relates to the matter of my interest.
I read permanently your blog and studied BWILC of Dr Forex. I try to implement the 4×1 strategy in my trading. Eventually I realized that I miss some very crucial concept – stop-loss usage.
My logic is as follows:
The strategy is based on trend following. The crucial aspect of this affair is to know the moment of trend reversal or trend change. This event is so important in the sense of the above strategy that I’ll reserve for it a special abbreviation – TC. I would even declare the following maxim: “If you know exact date and time of TC you don’t need stop-losses. Until trend is in place any your paper loss will be compensated and become a profit”.
May be already this maxim is already erroneous but I’ll continue.
I encounter 3 ways to indicate the TC.
1) As described in BWILC. The TC should be suspected and all losing trades consequently closed if the working grid is broken some pips. The minus of the method in that the combined losses of all opened Q1..Q4 trades (taking pyramiding into account) may be quite substantial.
2) According to your recently declared approach. Stopping with about 100 pips loss.
Both methods are quite technical. The drawback of both methods is that instead of taking the pain of paper loss and waiting until the trend will do its work we take the losses on triggering of some mechanical targets. Obviously the assumption here is that the probability of the trend still in place is much bigger than that of the TC. It is so because trend is by definition something that lasts for years.
3) Indication of the trend based strictly on the fundamental factors. The drawback is that for the fundamental factors to be assured the TC must have happened a long time before when the losses may become quite big without any hope for rebound.
So even with indicated drawbacks the first 2 methods should be considered preferable but with some addition. The loss should be accepted not simply on hitting the loss target but in conjunction with the fundamental factors. If they are strictly in favor of TC the loss should be accepted. If the fundamental factors are neutral or pro trend continuation I would consider even the loss target shifting thus perpetrating the book instructions.

It would be very interesting to receive your opinion on the subject.

Comment from Colin McGinley
Time 24 October, 2007 at 11:31 am

Hi chainastole,
I have yet to weather a change in my trend direction so any thoughts I put forth here are hypothetical in nature and I’ve yet to put them into real practice. I’m sure there will come a day when I have experienced a major trend change and I’ll be battle weary and scarred from the encounter but until then I can only offer potential plans of action.

I envisage identifying a trend change mainly through analysis of the fundamentals, along with a smidge of technical analysis.

Fundamentals rarely ever change on a dime. Instead they take time to shift and for a new viewpoint or reality to emerge. I often imagine fundamentals like a huge ocean liner ship. When it gets going in one direction it can take a long time for it to slow down and change direction.

On the technical side I will mainly use the grid as you have described in point 1. The top and bottom of the grid are usually anchored at strong support and resistance levels. A break of the grid in the wrong direction therefore is normally also a break of a strong support/resistance level.

If a grid break in the wrong direction occurs and the fundamentals are looking weak or murky then it is time to consider the possiblity of a trend reversal instead of a simple correction.

More than likely you will have lost money on positions if the grid is broken or regular stop losses are hit. Since I only trade in the direction that I think the trend is going in, if the trend has started to change and I haven’t confirmed that yet (which is unlikely if price is still within my regular grid) then taking losses can not be helped. Losses are a part of trading so I just take them and move on.

Losses when a trend change takes place are therefore going to be unavoidable. I know this and am hopefully mentally prepared for when I experience such a major trend change.

Is it possible that a major trend change will get underway without a significant shift in the underlying fundamentals? This is always a possibity, but probably not very likely. What might be more probable is that a major correction takes place that breaks the grid to the downside but recovers back into the grid all while the fundamentals have not changed. If after this correction the fundamentals start to weaken then the correction could have been a precursor to a trend direction.

Currency trends are well known for over-extending themselves. Therefore is more likely that fundamentals will start to weaken first, but the original trend still continues in face of all the new fundies. The trend will eventually change but only after exhausting itself first. Obviously in this case the fundamentals are giving a nice warning in advance so the trend change should be handled more orderly for those that see the signs.

Chainastole, you pretty much sum things up well in your last paragraph. Taking losses is preferable and almost unavoidable during a trend change. You would have put those trades on when the origianl trend was still in progress and you still believed in it.

Price reacting to the fundamentals and simple technicals that I use will be the only indication I have that a real trend reversal is in progress.

You only really know if it’s a true trend change after the fact: when all the trendlines and other technical levels have well and truely been broken. You can’t trade in hindsight though. You can only trade what you see right now, what is at the hard right edge of the chart. For this reason you must be prepared for a trend change and know how you will hopefully recognise and adapt to the change when you see it, but you can’t let the fear of an immenint trend change deter you from putting on trades with the trend that you see in place right now.

Anyway, hope that helps.

I’m sure I’ll have a different view once I have hard experience of going through a major trend change myself. Since I trade in the direction of dollar weakness I’m not seeing any signs of true dollar strength just yet, so it might be a while…

Comment from chainastole
Time 24 October, 2007 at 3:15 pm

Than you very much, Colin, for your comprehensive answering. One more question: what simple technicals do you use?

Comment from Colin McGinley
Time 24 October, 2007 at 3:54 pm

I keep my use of technicals very simple.
As already explained I use horizontal support and resistance lines, which generally form the extremes of my grid.
Beyond that I ever only really use the detrended oscillator for picking potential profit targets and fibonacci confluence areas (which generally coincidence with existing support/resistance levels).
See my Look! No Indicators post from last year for further information on how I continue to use these indicators (which is on an infrequent basis).

Comment from dickois
Time 2 November, 2007 at 3:57 am

Hey Colin love your blog and congrats on the fx competition. I wanted to ask you what has been you biggest drawdown percentage wise going the BWILC strategy. Why not go full time man. Take care

Comment from Colin McGinley
Time 2 November, 2007 at 7:41 pm

I’ve actually been updating my trading records for the past week, looking to extract some statistics from my trading performance over the past twenty months. Figuring out my maximum drawdown is one of the statistics that I’m looking to calculate. I’ll be able to generate my maximum drawdown based on realised losses quite easily (since it’s based on closed trades), but I’ll also potentially be looking to calculate my drawdown on unrealised losses. This is a more time consuming endevour as I do not have a full record of my unrealised losses on a daily basis. Knowing your drawdrown based on unrealised loses is actually more accurate since the forex market uses a continual mark-to-market model.
I’ll post the numbers as soon as I’ve calculated them.
Going full-time is a long-term goal. I’ll only take the plunge once I have a large enough trading capital base and a large amount of savings so that I don’t feel totally pressured in having to make money each and every month.

Comment from Colin McGinley
Time 3 November, 2007 at 2:38 pm

I have added the drawdown calculation to my trading record spreadsheet. My largest drawdown to date has been 12.15% and it occurred on 13 June 2007.