After attending the TradeTime news trading seminar held by Tom Yeomans yesterday I want to record some of my thoughts.
Listening to another trader talk through their approach and execution of an actual trade can be a great learning experience. Tom actually had two economic news releases that he was looking to trade. The first one, US durable goods did not meet his desired trigger levels. Well before the actual news release itself Tom examines the aftermath of prior releases of that economic report. He determines what level of deviation the actual new release must be from the consensus numbers before he will look to act on that release. He plays things pretty conservatively and so looks for a large enough deviation from the consensus figure so that there will be a highly probable move of at least 30 pips or more.
The US durable goods gave a large enough deviation on the core reading to meet Tom’s required trigger, but the deviation on the headline number itself was nowhere near the desired trigger amount. The trade was a scratch. Not every release is going to meet the desired setup and so you need to be able to walk away from them.
The second economic piece of data that Tom was looking to trade yesterday was the US New Home Sales. The American housing market is closely watched at the moment, as it gives an early indication of how consumer spending might unfold. A slowdown in housing results in less spending power for consumers.
The New Home Sales release number exceeded the desired trigger level and gave a signal to buy USD. Tom primarily trades the EUR-USD pair. He now waits for the initial spike to occur and then retrace. The retrace occurs most times, as the people who got in on the spike, along with those who tried to get in, attempt to then quickly get out of their positions. If the retrace doesn’t occur then Tom scratches the trade. Price retraced slightly after the initial data release and Tom entered his trade.
Price bobbled around, retracing some more, seemingly stuck to the 1.29 level. A move south did not occur after almost 30 minutes of hovering around the same 1.29 level Tom exitted his trade for a 25 or 30 pip loss.
The fact that his first trade of the year was a loss does not bother me at all. In fact I’m kind of glad that it was a loss. You can learn far more about a trader and how he manages his trades by observing how they handle their losses rather than looking at their winners.
Tom has some clear rules in place to know when to get out of a trade if it’s not going his way. One of the simplest ones is a time limit. If price has not moved in the desired direction within 30 minutes of entering the trade then it’s time to get out. After those first 30 minutes the majority of traders are no longer focused on the impact that the news release had. They’re looking out for the next big thing.
Another exit strategy that Tom has is one that uses his anchors. He identifies anchor points at various price levels prior to the actual news release. These anchor points are just price levels at which price has tended to have hung around for extended periods of time in the recent past. Levels at which price seems to have been attracted and couldn’t get away from. Price will have touched these anchor price levels many times. Tom uses these anchor points as projected exit points. After a news release price should be drawn towards these anchor levels, and momentum should receed as the anchor points are reached. The move will tend to become exhausted as these anchor points are neared.
There will be anchor points both above and below price at the time of the economic data release. If price begins to move in the opposite direction forecast by the trigger levels, then if it nears or touches one of the pre-determined anchor points then that is seen a good time to exit the trade for a loss.
A third way of determining when to exit used by Tom is looking at a correlated pair to see what it is up to. Tom likes to use USD-CAD as his correlation pair of choice for the EUR-USD. If the USD-CAD is showing movement in the wrong direction then that is another sign that his current loss has less likelihood to turning around and moving into profit.
The final way that Tom seemed to use to know when to cut his loss was his gut. Obviously after doing this type of news trading for many years now, Tom has a good feel for how the market reacts around these news releases. His sub-conscious is probably able to process all the current information and price movement, which then feeds into his thoughts and feelings. If he becomes too uneasy then it’s time to get out.
As the losing trade remained on for ten, twenty and then to almost thirty minutes Tom talked through all the various exit signs he looks for. He was checking the USD-CAD chart to see what it was up to. The Canadian dollar seemed to be having a good morning, with rising oil prices perking it up. This signified that the US dollar was going to have trouble moving back into the black on the EUR-USD. His thirty minute time limit was rapidly approaching. His unease was building. I think that if it hadn’t been mainly a training seminar that he would have cut his loss a lot earlier but he wanted to show how he manages his losers. Finally price hit one of his predetermined anchor points and he closed the trade for a loss.
Every trader is going to have losing trades. No matter how much you try to always have winners, you are never going to be able to escape from having to deal with a loss.
Sure a winning trade would have been nice for Tom to have. Everyone in the seminar room could have watched him grab a quick eight pip profit and be done for the day, thinking that this is the way to trade. It couldn’t be simpler. Having to sit there through almost thirty minutes of watching the trade struggle to get back into the black before it moved decisively in the opposite direction is a much better learning experience. You get a better feel for what sort of tough choices you’re going to have to make, and if you’re able to handle making them.
I’d like to finish off with a couple of observations about spike trading. The first deals with a comment that Richard Olsen, one of the founders of Oanda, made to Tom, Felix and potentially other news traders. Richard basically told them that it was okay to trade news releases as long as Oanda was given enough time to match any orders placed on the news release itself with their back-end banks. This is one of the reasons why Oanda widens their spread just before the actual release of the economic report. They’re looking to buy themselves some time to fill all the orders placed and route counter orders through to the banks that they deal with. Felix and other spike traders seem to have ignored this ‘suggestion’ from Richard Olsen and it may come back to haunt them in the near future as they’re not giving Oanda the necessary time to cover themselves. Tom, on the other hand, seems to have taken this advice on board and has adopted his trading style to suit the new landscape.
A second observation I have goes back to an e-mail that Dustin of forexmastermaker.com sent out early this month. Dustin runs a news trading service that uses a software application to get the trader in before the spike occurs. I’m sure Dustin won’t mind the extra exposure so I will quote the interesting part of that e-mail here and then make a few comments on the situation.
The Forex Live-on-the-News Trading Room service has been DOWN for 48 hours… and we owe you an explanation…
The explanation is not pretty, and you may find it a little unbelievable, but sometimes human nature and reaction to threats does seem a little unbelievable.
Four days ago I received the following threatening messages (only excerpts are quoted and the author’s identity cannot be revealed for legal reasons):
‘I spoke to you a while ago about the consequences of having too many news traders on the grid drying up liquidity at news times. Your response to me was unsatisfactory … so I had your Bloomberg shut down.’
‘Obviously I don’t have to compel you that your Bloomberg is shut off. Because it is shut off. Remember when xxxxxx was so professional and pleaded to you … to limit your subscriber base so we can all continue trading news? Wouldn’t that have been the easier way out?’
‘The way I see it YOU are now directly interfering with my ability to produce an income and that is something I will NOT accept. Therefore you have two options 1) I inform my contact in Bloomberg legal that I am willing to provide evidence against you and you will find yourself in the same boat xxxxx is in now which is potentially jail … or 2) We can agree that you limit your subscriber base and also start reducing numbers to less then 150.’
‘So it is up to you. Wise up and be sensible or accept the fact I will get you prosecuted (and do everything in my power to send you to jail).’
BLOOMBERG NEWS SERVICE SHUT DOWN
The trader making these threats is a professional trader at the institutional level and is obviously VERY AFRAID of our trading approach (it works, and you can make money, and easily…)
And he has contacts in high places. He did lean on his contacts, and he did have our news feed shut down.
THREATENING MESSAGES SENT TO OUR MARKETING PARTNERS
One of our marketing partners received this message (excerpts only):
‘xxxxx, you’d better sever your ties (with Dustin) quick, and I mean YESTERDAY, b/c this will NOT be good for you or your ‘business’ in the long run, and I will see to it myself.’
‘xxxx and Dustin’s greed, is ruining honest people’s ablility to make money in forex and also affecting my business, and my family’s financial future, and I will DESTROY anyone that fxxx’s with my family. Now you are an accomplice to Dustin, and will be treated the same way.’
I apologize for the graphic language and naked threats of destruction… but you would find it hard to believe how ‘scared’ some professional Forex traders are of our trading ‘live-on-the-news’ system if you didn’t read it first-hand for yourself.
Now why is this institutional trader so mad at Dustin and company?
To understand the reason you have to know about how the forex market really works. Just like any other market for every buyer there has to be a seller. When you make a trade at news release time, whatever trade you place there must be a counterparty to your trade. If you go long then someone else has to go short. The reason you get spikes at news release time is that everyone all of sudden decides to trade in the same direction. This means that there is no one to take the opposite side of all their desired trades. Price moves in the direction that demad is driving it until it finds a price level at which people are willing to take the opposite side of all the trades being placed. This is why you can see instant tick moves of 30, 40, 50 or more pips.
To spike trade you need to get your order in before all the people willing to take the opposite side of your trade dry up (either they stay out of the market or switch to the same direction that you’re trading in). It’s a race to see who can get their orders in first. There is a finite number of orders that can be filled before the liquidity dres up. Institutional traders normally have the edge in these situations, as they can afford to have the best technology and thus get news first and get the the best fills.
Retail spike traders using software to get them instantly into the trade are beginning to level the playing field. They are able to get in just as quick as the institutional traders, and this is what is causing the trader in Dustin’s e-mail such grief.
A small victory for the retail trader, but a short lived one at that. It all goes back to the drying up of the liquidity. If too many retail traders play the spike trading game then it is a crap-shoot as to which of them will be able to get their orders in first. Too many cooks here certainly does spoil the broth.
If you’re using software to get you into the trade instantly and there are too many other traders attempting to do the same thing then factors completely outside of your control are going to decide if you get into that trade or not. Your internat connection speed, the quality of your ISP, any bottlenecks between your computer and your broker’s server computer. Your trading edge is blunted by having to deal with these issues.
This is one of the main reasons why Tom stays out of spike trading. He waits for the spread to return to normal, which signals the return of liquidity to the market.