ForexSpirit

While I wait out the current US dollar bullishness to subside I decided to scratch an itch I’ve had for a few weeks and test out Tom Yeoman’s ForexGrail strength meter.

I’ve resisted looking into this trading tool for quite a while as I know that Tom prefers to trade short time frames, generally 5 minutes charts, which have never seemed to mesh very well with me. After trading for five years now I know only too well the randomness vortex that exists in these short time frames.

The ForexGrail is a Windows application that shows the relative strength of an individual currency.

When EUR/USD is rising there is at least one of the following two reason in play (if not both): the euro is strengthening and/or the US dollar is weakening. If you want to figure out technically which is the case you can look at other currency pairs that contain the euro and US dollar and see if the euro is also gaining against other currencies, or if the dollar is weakening elsewhere.

The ForexGrail does this examination for you and if a currency is strengthening against multiple currencies then it will be given a value closer to ten. If a currency is weak against multiple other currencies then the application will give it a value on the bottom end of the scale closer to zero.

The application uses a MetaTrader DDE price feed as its data input and thus must be run for a while before you can see any real trends or changes in the strength or weakness of any individual currency.

As a quick example, here’s a quick snapshot from today’s price action:

The US dollar has been generally strong all day while the Aussie dollar has been beaten down (not surprising give the RBA’s statement from last night).

The ForexGrail thus allows you to quickly zone in on a currency pair that is trending nicely without having to examine tons of charts.

Another reason why I haven’t given up completely on short term time frames is something that has stuck with me from reading Richard McCall’s Way of the Warrior-Trader. McCall’s approach to trading is grounded in his martial arts background and is steeped in the way of the samurai. He focuses on short term trading (for him on the e-minis) for no more than an hour each morning. Just as a samurai sword fight is quick and brutal, McCall recommends focusing all your energies on your trading activities for a limited amount of time. You engage with the market for however long you are at your peak mental fitness, and then disengage and rest for the remainder of the day.

I think I’ve mentioned this concept a few times before and generally tried to apply it in the way I approach the market for medium and long-term trading: the majority of my analysis and market research is done during a twenty to thirty minute period in the morning.

As I dial down the time frames on my charts and look to examine those five minute charts again I need to take heed of this same approach to make sure that I don’t get sucked into the relentless tick movements at these shorter time frames. I don’t want to be watching prices bob up and down for hours on end. I want to be able to hone in on where the action is, which hopefully the ForexGrail will help with, spot a trading opportunity that fulfills a predefined set of criteria. Manage and exit the trade within a reasonable timeframe and then go about the rest of my day.

It’s very early days yet on how viable this sort of trading approach might be for me, but I think it’s worth examining since I have learned a lot on my trading adventure since the last time I really engaged with short time frames.

July turned out to be another difficult month for trend trading the EUR/USD. After breaching the high just above the 1.6 handle on July 15, price plunged back into the range it has been wading in since March.

My two winning trades for the month were in the first half of the month leading up to the test of 1.6. I also had two breakeven trades; one right at the start of the month and one in the final week. Six losing trades in the later half of the month ate away my wins and left me in the red for the month overall.

Three of those losing trades were AH entries; in other words, systematic entries losing to get back in the market at the price I had been previously stopped out. Unfortunately there was no real follow through in the main trend direction during the second half of the month and so the initial trade loss was compounded by the AH loss.

My equity for the month was reduced by -9.07%.

With only 10 trades for the month I feel like I’ve kept my tendency to over trade from earlier this year in check for another month.

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.

Over the weekend I decided it was time I got back to catching up the small stack of trading books I have sitting on the shelf. Unsure as to which one to read first I picked out two and read the first 30 pages of each to see which piqued my interest more.

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.

Since I’ve been recently posting monthly reviews to cover my time away from blogging, let’s get things right up to date and look at how July has been going so far for me.

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.