I have done some major contemplation and wanted to share with you 4 beliefs (hangups?) I have with certain aspects of trading and I’d appreciate any feedback you’d have.
1) Charts – I have studied all the chart strategies that traders use (patterns, support/resistance, trend, etc.) and I simply cannot wrap my head around why this would be effective other than as a self-fulfilling prophecy by the techies. And how much do technical analysts take up of the overall money moving in and out of fx markets? I’ve heard from as little as 10% up to 90%. So who knows how much influence TA traders have anyways. I do look at charts but really as a means to get into the minds of TA traders. Something like, “ok, what do the self-fulfilling prophecy traders see and possibly might do, and how can I perhaps benefit from that? (either going with or against them)”. I have seen price action traders draw lines all over their charts preaching support and resistance. But to me, it’s just a line on a computer screen. Whether it “breaks/holds and tests/re-tests” are, to me, all just unfounded words.
2) This is related to #1 above….charts and TA seems a sort of “dumbed down” way to trade. Like, as you have mentioned many times….does the big money really say to themselves…”here’s a line on my chart with a bullish candlestick pattern….I’m going long”? I would much prefer to trade with information….like having an idea of what a central banker is going to do or say that will make the markets move, or knowing something fundamentally about the global economy and how it would affect rates. To me, this requires “intelligence” and looks, feels, and sounds like how trading should be about.
Now I have no doubt there are many trader making good money thru just charts alone, but to me there has to be something more to it than that. I don’t know, maybe I am just overcomplicating something that is unnecessary to complicate….or maybe I am wanting something that does not exist (for example, info. like Boeing is about to purchase dollars to bring money to the U.S. from overseas operations, or a central bank is managing their reserves and selling sterling for euros, or other types of “real money” flows like this)….but I have not been able to bring myself to trade off of charts…in fact, I rarely look at them…I mainly keep price quotes up along with the high and low of the day and maybe a very condensed 1 minute chart just to see the flow of action throughout the day.
3) Using stop-losses….Another hangup I have is the thought I always have of putting in a stop-loss and thinking at some point it is going to get taken out on a spike into it and then reversed back into my original direction. Again, this is something I know happens to every trader and I am trying to learn to cope with it.
4) In the FX markets, a pair cannot move without affecting another pair. As an example, EUR/JPY can move due to its own EJ flows, but it can also move as arbitrage/computer programs move EJ in line with moves stemming from EUR/USD and/or USD/JPY or other pairs. In other words, that support level that just broke on EJ, or that downtrend you see on that pair’s chart, might have zero to do with anything other than someone had a lot of EUR/USD to sell and/or someone had a lot of USD/JPY to sell…..EUR/USD * USD/JPY = EUR/JPY….and the computer algos are simply driving EUR/JPY to the point of “agreeing with” the other two pairs. In other words, the charts/price movement we see can a lot of times be being driven by something totally unrelated to that individual pair…..so analyzing pairs as opposed to an entire currency would not be as effective in my opinion. I envision it like 28 pairs all tied in together in one big web….a machine where the gears turning in one pair affect all the other pairs in some way.
Anyways, just a few thoughts. Like I said, I don’t want to say that someone else’s way of trading and making money are not good….hey, if someone is making money using charts or technical indicators like Stochastics, MACD, and what not….more power to them. But for me, I need something more than a chart. At least where I am at now with my trading philosophy.
It is terrific that you are writing down your market beliefs and contemplations!! I did the same thing over the years and still do it now. I just never had anyone to share them with, so I kind of had to figure out a lot by myself.
I would love to give you feedback.
1 & 2: Charts are good and important, it just depends on how you use them. For example, back in the tech indic and chart pattern stage, I used to think they “had” to cause the price to move and actually caused the price to move via the self fulfilling prophecy, etc. It was the completely wrong way to view them. I don’t need charts to trade, but I use them all the time, because they help me visualize the volatility and news impacts and price sensitivity. And of course help with stops and barriers.
The small improvement that I made from the chart patterns to beginning order flow trader was to forget about the chart patterns and price patterns and to focus on labeling the stops and barriers that were tripped on the chart. So I did that, and it opened my eyes to the number of false breakouts and stop hunts and barriers that were knocked out. Eventually, I found that there was a missing element as not all of the price movement can be explained using stops and barriers. There had to be a deeper element. And eventually I found it with the news trading and eventually global macro trading based on expectations, information flow, scenarios, etc. I combined them into what I call the “news/sent/fund/macro players.”
So when I see a chart, I don’t really see the chart patterns, although they do pop in my mind as I do remember them. Instead I see the volatility, I see the ODVE’s, MDMM’s, and GM’s move on the chart. I see the shifting expectations on the chart of the macro players. I identify the divergence between expectations and reality that play out on the chart and cause the price movement. And of course the stops and barriers from the beginning order flow stage.
When I could do that – identify the scenarios and expectation shift that moved the market and caused the volatility that you see on a chart, then I was ecstatic and knew that it would change my trading forever. It changed the way I looked at the market and how I look at a chart.
Charts and price alerts, etc allow someone to keep tabs on and trade a larger amount of currencies and financial instruments than they otherwise would have. It would be difficult for someone like Livermore to trade all the different stocks and financial instruments that exist today. Back in the days he had his quotation boys post the quotes on the chalkboard. With the advent of charts, you can do a similar thing, but it’s just so much easier.
The problem with charts, as you say, it is the dumbed down way to trade. Some people see all this technology craze over the past few decades and think that the technology is going to make trading easier and effortless. That they can give up doing some work and try to just have a forex robot do the work, or have a simple engulfing pattern to only look for, etc. Trading doesn’t have to be struggle, but you do have to put forth an effort. An effort based on the right trading mindset and principles.
Again, I like charts and many top traders use them. But the real power, the really big and fast money, comes not from the charts, but from the macro and volatility caused by the scenarios and expectations and information flow.
If you take a look at the Market Wizards books and pay good attention and do good analysis, you will notice that the traders that have the most money are not the pure chartists. The traders that have the most money may look at charts, but also have a very heavy component of some sort of information flow, global macro, etc element to their trading. People like Bruce Kovner, Stanley Druckenmiller, Paul Tudor Jones, Steven Cohen, Michael Platt, etc. They typically have a lot more money than the pure chartists because they know that the market is much more than a chart!
They have figured out that Global Macro + Charts is better than Just Charts:
Global Macro + Charts > Charts
As the book Soros: The Life and Times of a Messianic Billionaire, writes about Soros:
He consumes all this information, digests it all, and from there he can come out with his opinion as to how this is all going to be sorted out. What the impact will be on the dollar or other currencies, the interest rate markets. He’ll look at charts, but most of the information he’s processing is verbal, not statistical.
I had one trade example from this week. I shorted USD/JPY around 98.25 on August 26, then I covered the trade at the end of the NY session on August 27. The trade was based on my assumption that risk aversion would come from the potential for a Syria strike. I thought the market was mispriced for that scenario. Now, depending on whose brokers daily charts you look at, on my charts, they show a bearish pin bar form on USD/JPY on August 23. In reality, I didn’t notice the pin bar until I was writing this response to you, which made me think of examples to show you. In my opinion, the pin bar didn’t “cause” USD/JPY to drop down to 97.00 and take out the stops there. It was the news/sent/fund/macro order flow that did it, even if it was just for a ODVE. Back in the days I struggled with these issues and beliefs, even thinking that somehow the “pin bar” predicted the future and predicted the wars and economic data, etc. It took a long while for me to shake free of those market beliefs and replace them with better ones firmly rooted in the information flow, volatility moves of ODVE, MDMM, GM and global macro scenarios, etc.
3. The use of stops kind of depends on what type of trading you are doing and what kind of leverage you are using. If you are using crazy leverage, then you need to have some way to get out of the market, because a 100 pip move could represent a huge % of your equity. Placing a physical stop can sometimes limit the loss if there is a real spike and real volatility against your position, because a physical stop will generally get executed at a better price than a mental stop, assuming that there is liquidity.
As you said, it could just be a temporary spike against you. In that case, the two things I can say are: try to find a better trade where the market isn’t going to spike “x” against you, whether that “x” is 50 pips, etc. There are some great trades where the market will spike against you by 50 pips before moving in your favor, but there are also other ones where it won’t retrace much at all and keep going in your favor. It just depends on how heavy the news/sent/fund/macro is in favor of your trade.
The second thing is to reduce position size. The less leverage, the smaller your position, then the better you can handle the fluctuations.
The reason the big hedge funds don’t use stops is because they tend to run less leverage or no leverage, and smaller position sizes. For example, if Soros has on a $3 billion currency trade, it may only represent 20% of his account equity of $15 billion. So if USD/JPY moves against him by 300 pips let’s say, that is only a paper loss of $90 million or -0.60% of his account, so he can hold through it if he wants to. The average retail trader is using like 5x – 20x leverage, so if they had USD/JPY move 300 pips against them, they could lose 30% up to wiping out their account.
I don’t use as many physical stops as I used to. I usually use mental stops. There will be somedays the market blows through my stops and I will take a bigger than expected loss. But there will also be other days when the market moves heavily in my favor blowing through my profit expectations. So I would say it tends to balance out if you can stay in the game long enough and find the good trades.
4. I used to attempt to focus on the algorithmic, and quant traders, and the triangular arbitrage traders a few years ago. I say attempt, because I was never able to understand them fully and never able to find a way to take advantage of them. So I don’t focus that much time on them. I do think there is a triangular arbitrage connection between some related pairs, but I just leave that to those arbitrage traders who can exploit them. My edge doesn’t lie in that type of programming or statistics or mathematical modeling, etc. My edge relies on clearer insight and interpretation of the information flow. I never saw Soros or PTJ talk about such things, so I figured I might as well shrug it off and forget about it. Some people might say well back in the 1980’s there were no HFT, etc. That’s true but the markets are the same today as they were back then. They are filled with expectations, news, sentiment, information flow, battle of global macro scenarios, etc. The HFT and algorithms may have replaced some of the human market makers over the phone, but it’s all still the same. Same volatility, same stop runs, same stop cascades, etc. Things haven’t changed.
The way I see it, in your example of EUR/JPY going lower based on some big sell orders in EUR/USD, then the question I would ask myself is, why were there big EUR/USD sell orders? Is it due to EUR specific bearishness, or USD specific bullishness? Because if it is due to EUR specific bearishness, then that can easily cause EUR/JPY to go lower because bearish EUR macro effects EUR/JPY since EUR is part of the currency pair.
Take today for example – Thursday, August 29, 2013. The EUR/USD went down, but EUR/JPY stayed flat. Why didn’t the EUR/JPY go down 100 pips along with EUR/USD, if there was bearish EUR order flow? Well it’s because the JPY was weak today, so the bearish EUR order flow was battling it out with the bearish JPY macro order flow, and EUR/JPY ended up chopping around. It’s just a battle of scenarios the way I see it.
As you say, if someone wants to trade using stochastics or MACD and they make money and are happy, then good for them! Or whatever they use, whether it is chart patterns, or candlesticks, etc. If a person used to be making say $40k – $100k per year, and they find some stochastics or chart patterns that work for them and they make $500,000 per year or $1 million per year or $5 million per year, then bless them! That is infinitely more preferable than their previous life.
I just went through the trading journey and realized how hard it was to shake the beliefs of technical indicators and chart patterns. To just get sucked into depression because you don’t know anything else and cannot see the light at the end of the tunnel. I know some people 7, 8 years later still trying the same old thing. It makes me both sad and happy. Sad that they are still stuck in their same ways and won’t change. But also happy that I was able to find a very effective way to break free and discover a whole new way of looking at the markets, and that I can share that will the world.