Trading Evolution

July 29, 2008 at 6:22 am Leave a comment

By FX Insights

Trading Evolution

This past week a few traders in our chat were talking about how my trading and views and ideas about the market have changed within the past 12 months. The idea was suggested that I write about this, and maybe give insight on some of those changes and why I’ve changed. I thought it was a great idea.

First of all, I don’t think success should only be measured by numbers, which in our case for the market we trade in would be ROI, but to me, being successful is having the ability to adapt to your environment, to be open to new ideas, to only adding the best ideas to your arsenal, and to stay fluid enough to recover quickly when you take a hit, learn from your failure, and discover how to better defeat your enemy and gain the advantage.

It’s imperative to maintain your edge and to listen to your gut. This is where the great Jesse Livermore failed… Livermore was considered the most brilliant equity speculator of all-time and the godfather of reading price action, but when he lost his edge and he listened to other people instead of listening to his gut, he lost his fortune. 

So, based on some of the ways I define success I can justify for why I do things differently than I did a year ago, 6 months ago, and even 3 months ago. 

The way I view the market overall is totally different than it was even just a few months ago. I view the market as a human being.

There are several reasons why I look at the market as a human being… the market has many traits of a human being – it’s emotional, it can display several types of moods, it needs to be fed, it can be manipulated and manipulate, you get the idea… plus, just like we as humans are vulnerable and susceptible to the influences of other humans, our market is vulnerable and susceptible to other markets.

The way I see it is that the market acts just like a person does… people have their ups and downs, their good days and their bad days, hot streaks, misfortunes, successes and failures. Some people outperform others, some have the natural ability to be the champ, while others have to work really hard to tread above water… 

It wasn’t until I started to view the market as the most screwed up and high maintenance person ever born that I was able to refine my trading style. For the longest time I didn’t have any view of the market. I didn’t even know how to view it, because at the beginning, the market didn’t make any sense to me. 

The evolution of my trading style really didn’t begin until I resolved two things:

1. Gaining a complete understanding of why the market reacts and responds as it does – to distill the market down into a few core principles and then from that point connecting all the dots.

2. Establishing my own personal view of the market and defining it in a way that makes sense to me. “Humanizing” it. I’ve always been fascinated by people. To me, the market is just another person, and viewing the market this way, I can relate to it and understand why it does what it does and what it may do in the future. 

Humans are creatures of habit and so is our market. By habit, I specifically mean pattern-like. People are pattern-like and so is the market. If you study a person long enough, you learn their patterns. If you study the market long enough, you learn its patterns. 

One of the best ways I’ve changed over the past year is to start only trading one pair. Over 99% of my trades are just the EUR/USD. I used to trade several pairs, but I’ve stopped doing that and it’s made a world of difference. 

Only focusing all of my time, attention, and energy on the euro has allowed me to figure the pair out on many different levels. It goes back to what I was saying earlier about studying patterns in people… being able to apply myself to the fulltime study of just the euro has revealed so many things I would have never understood had I tried to study it in addition to studying two or three other pairs. 

The next best thing I did was cutting out all of the unnecessary noise. The most unnecessary noise was candle charts. I used to look at a 5-minute, 30-minute, and 4-hour chart to help me determine where to get in and out of a trade, where the market could be headed, and when I thought it was topped out or bottomed out. 

Finally I realized candle charts couldn’t tell me anything, they couldn’t show me anything, they trick you into seeing things that aren’t there, and they fool you into seeing things that don’t exist. Candle charts gave me no competitive edge to understand anything about the market. 

I’ve never been into technicals, that’s no secret. People always ask me what my problem with technicals is. I could really careless if traders use them, it’s just my opinion that they are worthless as a trading tool for the EUR/USD. Because technicals are so lagging, they do a EUR/USD trader no good and can consistently cause that trader to be on the wrong side of the market. 

The EUR/USD is the most fundamentally-reactive pair in the market. The pair is made up of the world’s two most dominant currencies… based on this fact alone, naturally it’s going to be more responsive to economic data, central bank activities, interest rates, and overall market sentiment. The EUR/USD is the most heavily traded by the world’s most powerful banks. Those banks are very fundamental in how they view the EUR/USD, especially as it relates to all things interest rates. 

And that’s the next change – thinking like a bank trader. Thinking like a bank trader also went hand in hand with another bit of noise I cut out, which was not focusing too closely or emotionally reacting to the day-to-day fundamentals, but having a more broad-based view of the market’s fundamentals. 

What this means is not trading a specific news number or deviation of a forecasted number. To me, that’s just a dumb way to trade. Especially here lately, you can easily get a number that comes out worse than forecasted, and the knee-jerk reaction would be to trade based on that lower than forecasted number, yet the market goes the opposite way, totally defying logic. 

One of the best things I ever did was connect all the fundamental and economic dots directly to interest rates, interest rate policy, and future interest rate moves. I strongly believe interest rates are the #1 key driver of this market, so that is my main area of fundamental focus as a EUR/USD trader. 

The single most important change I’ve made to my trading style is putting most of my dependence solely on price action. For me, there’s no better indicator than price action. Price action gives you the play-by-play of the market, it tells you the mood the market’s in, it tells you what kind of appetite the market has and it tells you what kind of specific pattern mode it’s in, based on real-time factors, based on the human emotions of the market, and based on the market’s specific level of greed. 

I spend less and less time doing fundamental research and trying to predict what an actual number will print at, and with this extra time, I use it to simply watch the prices flash on my trade station, and learn from the patterns of what the market is telling me based on the way the prices are flashing in relation to where the market is moving, how far it is moving, and how fast it’s getting there. 

That right there tells me just about everything I need to know at any given moment in the market. The price action can tell me what type of liquidity is in the market, how heavily the banks are trading the market, and what kind of upside or downside momentum we have.

Incorporating the 30-minute EUR/USD price opening patterns into my intraday trading has also made a world of difference. Not only does it help me see ranges, pick tops/bottoms, exits/entries, but it’s also helped give me the patience to add more trades on a swing basis, for even bigger profits instead of just relying on intraday trades, which can have a higher failure rate as opposed to a good swing trade. 

There’s one thing that I haven’t changed and will probably never change, and at least for me, I think it’s another difference between failure and success – and that is keeping my mind pure and free from books, blogs, emails, videos, and message board posts from other people trying to analyze the market. Especially if they are not using any of the methods I use to trade the market. 

People forward me a lot of blogs and pieces written by the big name popular guys, but to be honest, I don’t read most of it. Sorry, no offense! I really don’t want to know what they have to say or what they think because most of them flip-flop with every little bump in the market. Consistency in this market is imperative. I have a few favorites that I’ll read when I have some time, but nothing I’d even feel like recommending. 

I think the market itself can tell me all I need to know. Of course I watch and track things like gold, oil, bonds, equities, and the financial markets, but that’s only because they have direct impact on the EUR/USD. But, whatever I need to know, I can usually find out by watching the market and staying intuitively connected with it as much as possible. 

Obviously we do a daily market update that’s typically filled with some sort of analysis, but when I write that thing, I do my best to write in a way that is more objective and based on what the market is telling me, not based on a feeling I have. All I can do is explain things the way I see the market explaining them to me. 

I guess this covers some of the biggest things I’ve changed and how I’m doing things now. This may be something I’ll add to as I spend more time trading the market and learning new things. 

The learning never ends. The market is constantly changing and evolving… I think one of the keys is to have a solid and consistent trading style that will easily adapt to the ever evolving market without comprising your style’s integrity.

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Trade Team Update – – 7/28/08 Stop Overthinking

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