There is an excellent post over on the Macrotactics blog that covers the salient points of the BWILC 4×1 methodology in a succinct overview.

It covers the four main pillars of Dirk’s approach to trading as well as a nice summary of strengths and weaknesses of this sort of trading strategy.

While I seem to be drifting from following all the core tenants of the 4×1 methodology in my current trading, it was useful to have a refresher.

If you’re new to grid trading or BWILC then this is a post well worth reading.

The two books battling it out were Day Trading the Currency Markets by Kathy Lien and Mastering the Trade by John Carter.

Kathy Lien’s book did not get off to the most promising start. In the first chapter, the forex market is explained and then compared to equities and futures. Somehow the forex market is better in every way; those pesky equity and futures markets are only open for a few hours a day. Examples are given of how expensive the spread and commission can be in a potential stock or future trade while nothing is mentioned about the large variety of spreads that exist on different currency pairs.

To my tough and cynical eyes the unbalanced comparison of forex to other tradable markets was nothing more than thinly veiled hype. What makes the cynicism all too easy to believe in is that Kathy Lien works for FXCM, one of the largest retail forex brokers around.

Statements of supposed fact are also uttered that had me raising my eyebrows in slight disbelief. For example:

“Most futures traders are technical traders, and as mentioned in the equities section, the FX market is perfect for technical analysis. In fact, it is the most commonly used analysis tool by professional traders.” (p. 12)

How exactly was that fact arrived at? Where’s the evidence? To me it just seemed to be a set-up: let the reader know that most of the pros make their money using technical analysis techniques, and then later in the book I’m sure there’s plenty of technical systems for them to try out.

The subtlety and sneakiness of this leapt out at me when I switched over and started to read John Carter’s Mastering the Trade.

John Carter kicks off Chapter 2 on Psychology 101 (always a good sign when trading psychology is placed way before any mention of markets or systems), with a section titled: Show me a guy with a system, and I’ll show you a guy who is welcome in my casino.

Any trader who is not 100% confident in their trading system ends up tweaking and modifying it when they experience a run of bad trades. The market has changed so I’d better re-jig my system parameters. This introduces the risk of making a mistake, such as by over-optimizing the system or getting flustered and over-riding your system’s signals.

“In the casinos, as in trading, it only takes one stupid bet to blow the whole wad. Casino owners know this, and this is why they sell the strategy books right there on the property, prominently displayed in their own gift shops. This elevates the concept of the fox guarding the hen house to a whole new level.” (p. 19)

While I’m sure Kathy Lien is a lovely lady, I think I’m going to stay clear of the foxes for now.

I’ve had four trades closed out in July. The first was entered at 1.5850 on July 2nd and ending up being a breakeven trade, closing out almost exactly 24 hours later.

I snuck a trade in while I was on holiday last weekend, with a limit order at 1.5650 being hit on Sunday night (July 6th). This second trade was closed out on Monday evening by a stop loss at 1.5700 for 50 pips profit.

I had a buy stop order in at 1.5750, looking for a breakout from the week’s congestion, which got executed during the start of Thursday’s London session. Unfortunately this turned out to be a false breakout and my 50 stop loss was hit pretty quickly thereafter. I was back to being all square pipwise, but moneywise I was down just slightly, as the lot size of trade three was slightly larger than that of trade two (due to the increase in equity achieved by those 50 pips profit).

It wasn’t long before another breakout was on the cards during Thursday’s New York session.

I jumped back in with a market order at 1.5777. Seems like I’d missed all the action though, as price just meandered around 1.5780 for the rest of the day.

It didn’t take long before things picked up again. Friday morning and the rumour mill went into overtime on what the future of Fannie Mae and Freddie Mac might be. The sharks were circling and there seemed to be a good chance of more financial blood in the water. The US dollar got sold across the board.

My stop loss rule kicked in after EUR/USD came off its high for the day (which was near 1.5945), and I closed out the trade for 111 pips profit at 1.5888.

I have no open trades at this time but do have two resting orders. One is a limit order at 1.5650 that was placed on Thursday in case price decided to come back down to that level, as it seems to be a very strong support region. With price above 1.5900 and the whole IndyMac scenario playing out I don’t think we’ll be seeing that level again for a while.

My other resting order is at 1.5950, which is an Anti-Hedge (AH) entry for my very first Jacko style trade back at the end of April (the one which, just-my-luck, had to be a loser).

An Anti-Hedge trade is one where after getting stopped out on a trade for a loss, you wait until price continues a certain amount below that loss level (in my case I use 50 pips), before placing a limit entry to get back into the market at the price you were stopped out at. In essence, you’re looking to get back into the trade you originally had on, trying to take advantage of the longer term trend to erase your original loss and hopefully pull in some additional profit.

I think it’s going to be a pretty interesting week ahead. The mortgage loan crisis seems to be far from over and I’m sure Ben Bernanke, Hank Paulson and all the other financial bigwigs are working overtime this weekend.

There was also symmetry between the two months in the number of trades I took which was again six in total. There were two winners, one breakeven and the remaining three were losers.

The two winners did me proud and my equity return for the month was 11.39%.

The most memorable part of the month was actually a whole week where I didn’t trade at all.

I closed out my big winner on June 9th at 1.5798 (on EUR/USD). I didn’t enter again until June 16th, as I waited out the large drop that took place during that time period, where price plunged 500 pips almost reaching 1.5300.

The amount of time I had to focus on trading was severely limited. This time around I paid heed to previous experiences where work was taking up my every moment and I kept my trading decisions well spaced out and my gearing low.

I’ve been caught out one too many times in the past making bad trading decisions due to other unrelated external pressures. I think I did remarkably well for the month taking these factors into account.

I only placed six trades for the whole month. There were three winners and three losers.

My return for the month was 2.52%.

The decision to simplify was seemingly vindicated, but would it continue?